Nike Inc Essay

530 Words3 Pages
Question 1: How, if at all, would you change Cohen’s equity cost of capital calculation? Why? In this case, Cohen calculated the equity cost of capital by using CAPM: rE = rf +βi ( E[rmkt]-rf ) 10.5% = 5.74% + 0.80 * (5.9%) * Risk free rate: The rf should be kept consistent with the time horizon of the investment. Since Cohen did her estimate in 2001 and Nike’s bond will expire in 2021, it is reasonable to use the 20-year T-bond rate, 5.74% as the risk free rate. * Risk premium: Arithmetic mean is often used for one-year period valuation, while geometric mean is better for long-term period estimated expected returns. * Beta: Cohen took the average value of historical betas to measure the risk. From my perspective, however, the most recent beta is more representative than the average beta in terms of reflecting future risk. Question 2: What is your estimate of the equity cost of capital? 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. To find the cost of debt, we should use the yield to maturity approach: PV=t=1Tc×FV(1+y)T+FV(1+y)T Nike’s bond with a current price of $95.60 will expire on 2021. If the NorthPoint Group decides to invest in 2001, interests will be paid semi-annually for 20 years at a rate of 6.75%. Thus we can calculate the current yield to maturity of the bond to represent the cost of debt before tax as following: 95.6=i=1406.75%×100(1+y)40+100(1+y)40 Question 4: What is your estimate of the debt cost of capital? According to

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