Nike Cost of Captial

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Nike Cost of Capital
I. Single of Multiple Costs of Capital
Since Nike has multiple business segments it is appropriate to question whether to use single or multiple costs of capital for the analysis. Kimi’s assistant Joanna went ahead and chose to use one cost of capital for Nike. We agree with her decision because Nike’s different segments are all generally sports related and are susceptible to the same market risks. For example, Nike’s footwear and apparel lines, which make up a combined 92% of their revenue, are segments that complement each other and are sold through the same marketing and distribution channels. Non-Nike products made up only 4.5% of Nike’s revenue including the Cole Haan brand, a company that sells casual dress and
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Instead of deriving the amount of equity from book values, we calculated Nike’s current market capitalization by multiplying the stock price by the number of shares outstanding and arrived at $11,427,435,000. According to our new calculations, debt is now 10.1% and equity is now 89.9% of Nike’s total capital.
III. Cost of Debt
By using the yield to maturity approach, we were able to calculate the cost of debt of Nike. Examining the information provided through exhibit 4, a 20 year bond was issued with an interest payment of 6.75% semi-annually. With this semi-annual status, I=3.375% and N would be equal to 40. Lastly, the current price of the bond (P1) is $95.60 and the par value (P0) is $100. Taking in to consideration the corporate tax rate of 38% and using the redeemable bond formula, we found the cost of debt to be equal to 4.5%. IV. Cost of Equity We estimated the cost of equity using both the capital-asset-pricing model (CAPM) and the dividend growth model (DGM). Two separate WACCs were calculated on separate sheets simply for comparison reasons. We choose to take the WACC using the cost of equity derived from the CAPM method however, since it is known to be the superior method. Our estimate of Nike’s cost of equity using the DGM method is 6.64%. This was achieved by taking the .48 dividend payment, dividing it by the current share price of $42.09 and adding it to the dividend growth rate of 5.0%. Our estimate of Nike’s

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