Nike Case

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Definition of WACC The Weighted Average Cost of Capital (WACC) is the rate at which the firm is expected to pay for capital raised by issuing debt and equity to finance its assets. It is the minimum return that the company should earn to satisfy the needs of the debt holders and shareholders of the company. It is calculated by proportionally weighing each category of capital such as common stock, preferred stock, long term and short term debts, bonds etc. It is the discount rate used to calculate the present value of the future cash flows when the risk pertaining to that particular cash-generating unit is similar to that of the overall firm WACC is calculated by multiplying the cost of each category of capital raised with its…show more content…
Disadvantages * Relies on estimates which may prove to be different from the actual results * High sensitivity to a small change in inputs * Subjective inputs can result in bad estimates DDM=Do+(1+g)/Po)+g = .48+1+.05542.09+ .055=6.7% Nike does not pay substantial dividends and hence this model does not provide the best way of calculating the cost of capital. Therefore, we rejected this model because it does not project the true cost of capital. Recommendation: Nike’s share is currently undervalued at 42.09 when we calculate the share price using Kim’s discount rate of 8.4%. As the discount rate mentioned above does not reflect the true market value, we decided to estimate the stock price using the discount rate of 9.85% using the Weighted Average cost of Capital (WACC). This gave us a stock price of $56.81 meaning that the Nike Inc. is undervalued by $14.72 per share. Adding this stock to the fund would prove profitable in the long run as the stock looks highly undervalued at the moment. We can support our calculations with the qualitative aspect such as the decision of the senior management to take steps in revitalizing the company. Also, Nike has decsided to add more lines to its athletic-shoe products

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