2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. * * I calculated the cost of debt differently by calculating the yield to maturity then taking the tax out of that. * For cost of equity I agreed with how she calculated it with using the geometric mean instead of the arithmetic mean, the risk free rate using the 20 year treasury rate, and an average beta * The weights of equity and debt I calculated differently. For equity I took the number of shares outstanding times the stock price to get 11503.2 million.
The Weighted Average Cost of Capital (WACC) is an average representing the expected return on all of a company's securities. Each source of capital, such as stocks, bonds, and other debt, is assigned a required rate of return, and then these required rates of return are weighted in proportion to the share each source of capital contributes to the company's capital structure. The resulting rate is what the firm would use as a minimum for evaluating a capital project or investment. After studying Joanna Cohen’s analysis for Nike, Inc, we found some flaws and we believe that some of the assumptions that she made were incorrect and somewhat altered the outcome of the WACC calculation. i) Joanna used the total shareholders’ equity figure in 2001 from the balance sheet of Exhibit 3.
Valuation Case Tottenham Hotspur, Plc. 1a – the value of Tottenham Hotspur based on the projections given in the case using a DCF analysis Weighted Average Cost of Capital (WACC) In this paragraph we discuss the WACC of Tottenham Hotspur. In the process of calculating WACC and determining the value of the company we assume that we are valuing the company from the perspective of the marginal investor. Value of debt We use the book value of all interest bearing debt at 31-12-2007 to estimate the value of debt, this equals 43,08 million. We miss essential information like the interest rate and maturity of the debt to calculate the market value of debt.
Based on the analysis in question 1, I estimate the cost of equity as following: 9.81% =5.74% + 0.69 * (5.9%) Question 3: How, if at all, would you change Cohen’s debt cost of capital calculation? Why? Cohen used the company’s average debt balance of 2000 and 2001 in estimating the cost of debt. However, as historical data, debt balances may not reflect the current or future cost of debt of Nike appropriately. Apparently, her calculation is wrong.
1. Cost of Capital Pratt and Grabowski (2010) defined cost of capital is the expected rate of return required by the managers in order to seeking additional funds for a particular investment. It measures the total costs to finance an investment through a combination of debt and equity taking into account different financial risks. There are several reasons why estimating the cost of capital is vital for the management of the company. First of all, cost of capital forces managers to reconsider the capital structure in order to discover the better approach to raise finances.
Her calculations are total bullshit. We used the yield on the currently traded Nike bond as the cost of debt. Since that would be the most likely determinant of what rate Nike would have to pay for a new debt issuance. V. CAPM model works the risk-free rate was correct. We chose the current beta for Nike and took the geometrical mean for the Market Risk Premium (5.74% + 0.69*5.9%)=9.81% VI.
Nike Case In my opinion Joanna Cohen’s WACC calculation is wack (my apologies I had to make that joke). I came to the same conclusion that Nike’s stock is undervalued; however the calculations were totally different. WACC is the total cost of financing the company. It is expressed as the weighted cost of debt plus the weighted cost of equity. My first step was to decide if the weights were done correctly.
The company regularly calculated “warranted equity value” for its common shares and repurchased its stock whenever the market price fell substantially below that value. The cost of capital for Marriott and for each of the three divisions individually could differ in each of the divisions resulting in varying cost of capital. In order for Marriott to only invest in a project, the internal rate of return (IRR) needs to be greater than the hurdle rate. To accurately determine the opportunity cost of capital. We will apply the cost of capital as the hurdle rate to discount future cash flows for the investment projects of the firm’s three divisions.
Introduction This case investigates the calculation of the weighted-average cost of capital (WACC) for Nike. The case provides a WACC calculation that contains errors based on conceptual misunderstandings, and we will use the correct method to come up with the correct WACC calculation which will allow us to properly compute the future estimated value of Nike stock. With this stock estimate, we can help guide NorthPoint as to whether Nike stock is a good buy. WACC and Its Importance The WACC is a calculation of a firm's cost of capital in which each category of capital is proportionately weighted. All capital sources - common stock, preferred stock, bonds and any other long-term debt - are included in a WACC calculation.
Case Study: Nike 1. What is the WACC and why is it important to estimate a firm’s cost of capital? What does it represent? Is the WACC set by investors or by managers? The weighted average cost of capital is the maximum rate of return a firm must earn on its investment so that the market value of company's shares will not drop.