Nike Essay

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Case Study: “Nike: Cost of Capital” 20 September, 2010 1. Do you agree with Joanna Cohen’s WACC calculation? Why or why not? Our group did not agree with Joanna’s WACC calculation. We believe that many of the assumptions that she made were incorrect and somewhat altered the outcome of the WACC calculation. The first piece that we disagreed with was with Joanna’s estimation of the equity of the company. Joanna simply used the Total Shareholders Equity figure off the balance sheet of Exhibit #2. We feel that she undervalues the equity of the company by using this figure. In our calculation, we multiplied the shares outstanding by the current market price of the stock. Our equity figure came out to (271.5 x $42.09) $11,427.4. This is significantly more than Joanna’s book value estimate of $3,494.5. We believe that Joanna mistakenly used the book value of equity rather than the market value of equity in her WACC calculations. This significantly impacts the equity to debt ratio used in the WACC calculation. It raises the equity portion of total capital from 73% to 90%. We agreed with Joanna’s debt figure of $1,296.6. Due to the change in equity, the debit percentage of total capital was reduced from 27% to 10%. Joanna used the current yield on the 20-year Treasury bond as her risk-free rate. According to exhibit #4, this was at 5.74%. We felt that this was too aggressive and believe that a more conservative estimate was in order. We did some searching on the Internet and found that a 90-Day Treasury Bill is most often used. “ Risk-free Return: The risk-free rate is a theoretical interest rate at which an investment may earn interest without incurring any risk. In practice, the risk-free rate is often a short-term Treasury rate (i.e., 90 Day Treasury Bill).” We selected the 90-day Treasury bond

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