Nike Essay

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Kyle Fortin 2/9/2011 Case 14: NIKE, INC.: COST OF CAPITAL 1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? The Weighted Average Cost of Capital is the average of the costs of a company's sources of financing-debt and equity, each of which is weighted by its respective use in the given situation. By taking a weighted average, it shows how much interest the company has to pay for every marginal dollar it finances. A firm's WACC is the overall required return on the firm as a whole and, it is often used internally by company directors to determine the economic feasibility of expansionary opportunities and mergers. Also, WACC is the appropriate discount rate to use in stock valuation. No, I don’t agree with Cohen’s WACC calculation. The cost of debt was determined incorrectly. To determine the cost of debt I calculated the yield to maturity based on the information available on the Current Yield from Exhibit 4. Cost of debt is the interest rate the firm must pay on new borrowing, which can be seen in the financial markets. Since Nike has bonds outstanding, then the YTM on those bonds (7.13%) is the market-required rate on the Nike’s debt. In order to solve for the total debt, I had to find out the market value of the debt. In doing so I multiplied the book value by the percent of face value that the debt was currently selling for (.9560) or the present value of the debt. I was able to use my calculation from the CAPM as my cost of equity (10.36%). In solving for the percentage of debt I simply subtracted my percentage of equity from 100. Lastly in figuring the tax shield, I used the rate of 38%, which was obtained by adding state taxes of 3 percent to the U.S. statutory rate from Exhibit 5. 2. If you do not agree with Cohen’s analysis, calculate your

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