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FINANCIAL MANAGEMENT GROUP 2

Nike Inc.
Cost of Capital
Anung Triningrum | Risyanto Krisna S | Muhtad Fadly|Hasnan Ridwan | Diaz

Nike Inc.
Case Background :

NorthPoint Large Cap Fund weighting

whether to buy Nikes stock Nike has experienced sales growth decline, declines in profits and market share Nike has reveal that it would increase exposure in mid-price footwear and apparel lines. It also commits to cut down expenses The market responded mixed signals to Nikes changes. Kimi Ford has done a cash flow estimation, and ask her assistant, Joanna Cohen to estimate cost of capital

What is WACC?

The cost of capital is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. Thus, it is also known as an opportunity cost WACC is calculated taking into account the relative weights of each component of the capital structure- debt and equity, and is used to see if the investment is worthwhile to undertake The WACC is set by the investors (or markets), not by managers. Therefore, we cannot observe the true WACC, we can only estimate it.
The minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of capital

Single cost or Multiple Cost?


We agree with the use of the single cost instead of multiple costs of capital. The reason of estimating WACC is to value the cash flows for the entire firm, that is provided by Kimi Ford. Plus, the business segments of Nike basically have about the same risk; thus, a single cost is sufficient for this analysis.

Value of Equity (E)


Cohens Calculation Cohen use the book value of equity : = $3,494.50 Our Calculation Our Calculation use : = Stock Price x Number of share outstanding = $42.09 x 271.5 = $11,427.44

Value of Debt (D)


Cohens Calculation Cohen use the book value of equity : = $3,494.50 Our Calculation Our Calculation use : = Current LT + Notes Payable + LT Debt (Discounted) = $5.4 + $855.30 + $416.72 = $1,277.42

Weight of Debt (WD)


= D / (D+E) = $1,277.42 / ($1,277.42 + $11,427.44) = 10.05%

Weight of Equity (WE)


= E / (D+E) = $11,427.44 / ($1,277.42 + $11,427.44) = 89.95%

Cost of Debt (Kd)


= YTM on 20 Year Nike Inc. Bond = 7.51%

Cost of Equity (Ke)


= Rf + (Rf Rm) = Rf + Beta*(MRP) = 9.81%

Rf = 5.74% (20 Year Yield on US Treasuries)


MRP = 5.90% (Geometric Mean) Beta = 0.69 (Most recent Beta)

WACC ?
WACC = (E/(D+E)) Ke + (D/(D+E)) Kd (1 - T) = (89.95% x 9.81%) + ((10.05% x 7.51%) (1 0.38)) = 9.29%