Nike Case Essay

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Nike Case In my opinion Joanna Cohen’s WACC calculation is wack (my apologies I had to make that joke). I came to the same conclusion that Nike’s stock is undervalued; however the calculations were totally different. WACC is the total cost of financing the company. It is expressed as the weighted cost of debt plus the weighted cost of equity. My first step was to decide if the weights were done correctly. With Nike and it’s publicly available information I felt that using their market capitalization would be a truer estimate than the book value used by Joanna. I found that multiplying the number of shares outstanding, 275.1 million, times the stock price of 42.09. Total equity ended up being $11,427 million. I felt that the book value of debt was still a reliable number. Adding the MV of equity and BV of debt together (11,427 + 1,296) then using that as the base to divide the equity (11427/(11427+1296))=89.81% is the weight of equity. 100-89.81 leads to a weight of debt of 10.19. When it came to calculating the cost of debt I felt the best way to evaluate it would be to estimate what it would cost for Nike to issue more debt from this point in time forward. I did not have information as to whether or not they could get more Japanese debt so cheaply, and the fact that their cost of debt under Joanna is less than the risk free rate does not make any sense. I took Nike’s current bond information on the market (N=50, PV=-956, PMT=67.5/2, FV=1000) you get an I/Y of 3.56*2=7.13%. That is the cost to issue new debt for Nike based on current market conditions. Should be 40 periods; -2 For the cost of equity Joanna did a better job. A mutual fund trying to get returns off of value based, large cap stocks will probably hold the stock for quite some time. Given this I thought her use of 5.74 as the risk free rate and 5.9 as the risk of premium was a good choice. When

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