Nike Case

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NIKE INC. CASE 14 Philip Chen, Choco Huang, Ariel Chou, Matt Krieger In this report we analyzed Cohen’s approach in calculating WACC. After observing how Cohen derived his figures we came up with our own WACC, terminal value, and EPS. Cohen broke down his calculations into five parts 1) Single or Multiple Costs of Capital 2) Proportion of capital from debt and equity 3) Cost of Debt 4) Cost of Equity 5) WACC In part one; we disagreed with Cohen where he decided to value the company as a whole instead of valuing each division separately. Since Nike is a multidivisional firm Cohen should of aggregated the values of the individual divisions and calculate a different cost of capital for each one. Since the exhibit 1…show more content…
The beta is the 0.69 YTD 06/30/2001 figure and our risk premium is the arithmetic mean. Both are found in exhibit 4. We used the arithmetic mean because it is a better indicator of the average returns in the past and 71% of financial analysts prefer arithmetic mean over geometric mean. Geometric mean is not preferred because (PLEASE ADD “WHY NOT” HERE. I REMEBER BOB DOING AN EXAMPLE IN CLASS WHERE GEOMETRIC MEAN IS A TRICK ON STUIPID INVESTORS). Here is our calculation of CAPM. CAPM=5.39%+0.69(7.50%). CAPM= 10.6% In Part 5 we can summarize our calculations for WACC. Table 1.2 shows our WACC. | Portion | Cost (K) | Contribution to WACC | Common Share | 30.57% | 10.60% | 3.24% | Debt | 69.43% | 9% | 6.25% | | | WACC | 9.49% | Our WACC is higher than Cohen’s because of the portions allocated to debt and equity, and the use of market value to calculate cost of debt. Since WACC has changed the terminal value will also change. The formula for terminal value= year 10 FCF*(1+L-T growth)/ (WACC-L-T growth). We used the L-T growth in exhibit 4, which is forecast of dividend growth at 5.50%. Therefore the new terminal value is 41,584. Since terminal value has changed the discounted present value of future cash flow will also change. The new discounted PV of FCF less debt is 21,224. The new EPS is $67.50 (21,224/271.5). MAYBE ADD CONCLUSION PLEASE Additional Calculation Table 1.3 | R/E Yr.2000 | NI Yr. 2001 | R/E Yr.2001 | |

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