Nike, Inc.: Cost of Capital - QUESTIONS 1. 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 cost of capital is rate of return required by a capital provider in exchange foregoing an investment in another project, assets or business with similar risk.
Inversely, when a share repurchase is seen as treasury stock, the cost of the treasury stock is naturally disclosed as a decrease in total shareholders’ equity. Alcoa would report the purchase of the treasury stock by debiting treasury stock and crediting cash for the charge of the purchase. The treasury stock ought to be disclosed independently in the shareholders' equity area of Alcoa’s balance sheet as an unallocated cut of shareholders' equity. These shares are treated as issued although not part of common stock outstanding. If subsequently resold for a sum larger than the cost, Alcoa should report for the sale of the treasury stock by debiting cash for the sale cost, crediting treasury stock for cost, and crediting additional paid-in capital from repurchased stock for the excess of the selling price over the cost.
The WACC would only be the cost of equity. Cost of Equity – We calculate the cost of equity using as an average of the cost based on CAPM, DCH and bond yield plus risk premium approach 1. CAPM – Under CAPM, cost of equity is calculated as Cost of equity = Rf + (Rm-Rf) beta where Rf = risk free rate which is taken as the long term rate to match the maturity of the project. Since the project is 8 years, we take the 10 year Treasury bond rate as the risk free rate. The current 10 year Treasury bond rate is 2.32% (Rm -Rf) is the market risk premium and is assumed to be 5.5% Beta
i) Joanna used the total shareholders’ equity figure in 2001 from the balance sheet of Exhibit 3. In our points of view, instead of using this figure, we should multiply the current price of Nike’s stock price by the numbers of shares outstanding. ii) When calculating the cost of debt, Joanna only used the total interest expense of the year (2001) divided it by the average debt balance, which fully ignored the discounted cash flow. iii) We agreed with Joanna’s debt figure of $1,296.6. Joanna used the current yields on the 20-year U.S. Treasury bond as her risk-free rate.
Bond value= C*[1-1(1+r)^t]/r + F/(1+r)^t = 70*[1-1(1+0.09)^8]/0.09 + 1000/(1+0.09)^8 = 889.30 Problem # 13 Using Treasury quotes: locate the treasury issue in figure 6.3 maturing in June 2023. Is this note or a bond? What is coupon rate? What is its bid price? What was the previous day’s asked price?
What is the right cost of capital for the various Equity options? Measure and explain the cost of capital for each equity option. 4. Now imagine you are HPI’s investment banker and you are proposing an ADR on the NYSE. You have to convince HPI’s bearer of the price at which they should issue the shares?
1.4 Compare and contrast debt and equity as a source of funds for financial claims. Financial claims: written promises to pay a specific sum of money (the principal) plus interest for the privilege of borrowing money over a period of time. Financial claims are issued by DSUs (liabilities) and purchased by SSUs (assets). Debt Funds: Equity Funds: Funds supplied in the form of a loan. Classified into short-term or long-term facilities Short-term = money Long-term = capital Suppliers of loans or debt funds face credit risk Credit risk: the risk the borrower won’t pay back loan Funds supplied in the form of the acquisition of an ownership share of a business.
Next, each item commitment quantity was calculated using its contribution margin and its total contribution in dollar to the revenue of the company. For e.g. if an item had a margin of $15 if sold, and $5 loss if not sold, the commitment value would be 0.75. Hence the optimal stock to keep would be three quarters of the probability of demand. If for instance, the corresponding error for 0.75 is 1.3, the optimal stock to keep for that item would be 1.3 * frozen forecast.
A company's securities typically include both debt and equity, one must therefore calculate both the cost of debt and the cost of equity to determine a company's cost of capital. However, a rate of return larger than the cost of capital is usually required. The cost of debt is relatively simple to calculate, as it is composed of the rate of interest paid. In practice, the interest-rate paid by the company
MULTIPLE CHOICE QUESTIONS 1. The statement of cash flows should help investors and creditors assess each of the following except the a. entity's ability to generate future income. b. entity's ability to pay dividends. c. reasons for the difference between net income and net cash provided by operating activities. d. cash investing and financing transactions during the period.