Nike Inc Cost of Capital Case Study

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Nike Inc. Case Number 2 Nike Incorporated’s cost of capital is a vital element when addressing opportunities regarding top-line growth and operating performance. Weighted Average Costs of Capital (WACC) is an essential estimation that is needed in order to determine the amount of interest that will be paid for each additional dollar financed. This translates to be the minimum overall required rate of return that the firm will keep. We disagree with Johanna Cohen’s assessment of Nike due to two factors. The first distinction we have made is in the way in which Cohen calculates the cost of debt. As she stated in her memo, Cohen calculates the cost of debt by taking the total interest expense for the year and dividing it by the…show more content…
This brings us to our outcome that that Nike is a buy stock along with a good investment. Therefore, our calculations of the cost of debt and the capital structure of the company differ from Cohen’s analysis that gave her a discount rate of 8.4%. Cohen’s discount rate would also put the current price as undervalued just more so than our analysis would predict. Conservatism of outlook regarding discretionary usage of models could be an important consideration also. Our Calculations Cost of Debt: YTM of Nike Bonds PV = -95.6 FV = 100 N= 40 20 yr * 2 for semi-annual parts PMT= 6.75/2 (semiannual) =7.1627% YTM=kd= 7.16% =3.5837*2 Debt: Current portion debt 5.4 NP 855.3 LT Debt 435.9 Total of Capital 1296.6 10.2% Equity $11,427.435 89.8% CAPM Equation: ra = rf + βa(rm – rf) Where, rf = Risk free rate βa = Beta of the security rm = Expected market return 5.74+.8(MRP) 5.74% +.8 (5.9%) = 10.46% or 10.5% WACC Calculation: E/(E+D) * Re + D/(E+D) *Rdebt(1-Tc), Where, E = market value of equity And D = book value of debt

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