543 Words3 Pages

1. What is yield to maturity for Nike’s bonds
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?
WACC is basically the rate of return required by a capital provider in exchange for not taking on another investment in another project with similar risk. In some ways, you can describe it as opportunity cost. WACC is the minimum return required by capital providers and managers should only invest in projects that give return in excess of WACC.
WACC takes into account all capital resources such as common stock, preffered stock, bonds and any other long-term debt. Usually a company’s assets are financed by either debt or equity. By taking a weighted average we can find out how much interest a company has to pay for every dollar it finances. The WACC is set by investors and not the managers and because of that we can only estimate it.
2. What was your estimate of WACC? What mistakes did Joanna Cohen make in her analysis? Which method is best for calculating the cost of equity? cost of equity =I used the 20 year at 5.74%+Geometric mean=5.9%x most recent beta .69=9.81%
Cost of Debt
I used Yield to maturity to find cost of debt
From Exhibit 4
PV= 95.60
N=40 (20years x 2) since its paid semiannually
Pmt=-3.375 (6.75/2)
FV=-100
Comp I = 3.58% (semiannual) 7.16% (annual)
After tax cost of debt = 7.16%(1-38%) = 4.44%
E = market value of the firm's equity
To find Market value of Equity you multiply share price by amount of shares
$42.09x273.3= 11503.
D = market value of the firm's debt
I valued book value of debt at 1,291
Then divide 11503/(11503+1291)=89.9 so the weight for debt is 10.1 percent
When I calculated WACC 4.44%x.101+9.81%x.899= 9.27%
Cohen made a few mistakes when she calculated her WACC. First, she used historical data in

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