Nike Inc Essay

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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. For that reason, it is also known as an opportunity cost. For investors, the rate return on a security is a benefit of investing. But for financial managers, the same rate of return is a cost of raising fund that is needed to operate the firm. In other words, the cost of raising fund is the firm’s cost of capital. Estimate a firm’s cost of capital is important because can help conclude required return for capital budgeting projects. Usually, the investor only picks up the project which provides higher return and lower risk on investments. Since the cost of capital is the minimum return required by investors, manager should invest only in projects that generate returns in excess of the cost of capital. Cost of capital can help define the acceptability of investment opportunities. Besides, the cost of capital can scheme the corporate finance arrangement. Generally, the best way for designing the corporate finance structure is based on information of changing of the capital market. So, manager can figure out information like accounting reports and their cost of capital to market. By using the information, manager can use cost of capital for restructure the market price and earning per share in order to bring advantage for company. By extension, it can help determine the decision whether to cancel or invest in project. Moreover, the cost of capital can help investors to determine the performance of the top management. With the intention of compare the ability of financial managers based on evaluation between the
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