Nike

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 firms apostrophize of capital? Do you
agree with Joanna Cohens WACC calculation? wherefore or why not?

The Weighted Average comprise of Capital is the average of the monetary mensurates of a orders sources of financing-debt and integrity, each of which is weight down by its respective use in the given situation. By taking a weighted average, it shows how much interest the gild has to accept for every marginal dollar it finances. A firms WACC is the boilersuit 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 prise to use in stock valuation.
No, I dont agree with Cohens 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 bring forbidden 4. Cost of debt is the interest rate the firm must pay on new borrowing, which can be seen in the monetary markets. Since Nike has bonds outstanding, then the YTM on those bonds (7.13%) is the market-required rate on the Nikes debt.




In order to solve for the total debt, I had to find out the market value of the debt. In doing so I work out 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 per centum 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 Cohens analysis, calculate your own WACC for Nike and be
prepared to justify your assumptions.

This is the formula I used in...If you want to get a full essay, order it on our website: Orderessay



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