Appendix I

C1: Equity = Stock Price x Number of Shares Outstanding

= $42.09 X 271.5

= $11,427.435 million

C2: Using Adjusted Beta formula:

Adjusted Beta = 0.67* historical Beta + 0.33 = 0.67* 0.69 +0.33=0.79

C3: Using CAPM formula:

KE = Krf + ß (Km-Krf) = 3.59%+0.79*6.7%=8.89%

C4: Using rearranged DGM formula:

KE =D1/P0 +g= 0.48(1+5.5%)/42.09 +5.5%=6.7%

C5: Using redeemable bond formula:

KD: 95.6= 100/ (1+KD/2)40 + 3.375(1-0.38)/(1+KD/2)n

KD=4.52%

C6: Using WACC formula:

Rwacc =4.52*10.19% + 8.89*89.81% = 8.44%

C7: average dividend growth rate: g = [0+12.5++ 20+12+8]/4 %=8%

(Assumption: In this calculation, the growth rates significantly higher than 20% and negative figure have been ignored.)

C8: Using CAPM:
*…show more content…*

* Using CAPM (popular) for calculate Ke

KE = KRF + (KM – KRF) x Beta

Beta: is seen as an ‘index of responsiveness’ of changes in a security’s returns relative to changes in returns on the market, in this case is sport utility industry)

(In Exhibit 4 of Nike Inc., given from 1996 is Average beta = 0.80, beta in 2001 is 0.69)

KRF: risk free rate

(KM - KRF) : Risk market premium

KM: Return on market.

Using KRF = Profitability rate of Government bonds (U.S. Treasury), in Exhibit 4 we have U.S Treasury 20-year KRF= 5.74%

According to Joana Cohen, she got risk premium = 5.90% (in Exhibit 4: geometric mean = 5.90%, arithmetic mean = 7.50%)

Because of arithmetic mean is better for one-year period estimated expected returns, while geometric mean is better for long-term period valuation. So, for long life valuation, we can find stable valuation (Jacquier et al., 2003). That’s the answer for Joana Cohen choses geometric mean for her calculated.

Joanna Cohen calculated: KE = 5.74% + 5.90% x 0.80 = 10.46% ( rounding 10.5%)

Cohen uses average beta from 1996 to July 2001, 0.80 to be the measure of systematic risk, but we need to find out a beta that is most representative to future beta. As such, most recent beta is the best choice in this situation (Sharpe, 1995). So most recent beta estimate is recent beta at 06 June 2001 is 0.69.

We have : KE = 5.74% +

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