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    Syndicate 1 Nike Cost of Capital Final

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    irfanmuafi
    1. Nike has multiple business segments but a single cost of capital can be used because the risk levels are not significantly different between segments. 2. WACC should be calculated using market values for debt and equity weights, not book values. Cohen incorrectly used book values. 3. Nike's cost of debt is estimated to be 7.13% based on the yield of one of its bonds. 4. Nike's cost of equity is estimated to be 9.811% using the CAPM model. 5. Plugging the figures into the WACC formula results in an estimated WACC of 9.27% for Nike.

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    Syndicate 1 Nike Cost of Capital Final

    Uploaded by

    irfanmuafi
    40 views2 pages
    1. Nike has multiple business segments but a single cost of capital can be used because the risk levels are not significantly different between segments. 2. WACC should be calculated using market values for debt and equity weights, not book values. Cohen incorrectly used book values. 3. Nike's cost of debt is estimated to be 7.13% based on the yield of one of its bonds. 4. Nike's cost of equity is estimated to be 9.811% using the CAPM model. 5. Plugging the figures into the WACC formula results in an estimated WACC of 9.27% for Nike.

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    nike cost of capital solution

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    1. Nike has multiple business segments but a single cost of capital can be used because the risk levels are not significantly different between segments. 2. WACC should be calculated using market values for debt and equity weights, not book values. Cohen incorrectly used book values. 3. Nike's cost of debt is estimated to be 7.13% based on the yield of one of its bonds. 4. Nike's cost of equity is estimated to be 9.811% using the CAPM model. 5. Plugging the figures into the WACC formula results in an estimated WACC of 9.27% for Nike.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    40 views2 pages

    Syndicate 1 Nike Cost of Capital Final

    Uploaded by

    irfanmuafi
    1. Nike has multiple business segments but a single cost of capital can be used because the risk levels are not significantly different between segments. 2. WACC should be calculated using market values for debt and equity weights, not book values. Cohen incorrectly used book values. 3. Nike's cost of debt is estimated to be 7.13% based on the yield of one of its bonds. 4. Nike's cost of equity is estimated to be 9.811% using the CAPM model. 5. Plugging the figures into the WACC formula results in an estimated WACC of 9.27% for Nike.

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    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Syndicate 1

    Fakhri Arsyi Hawari 29119046


    Intania Effendi 29119027
    Muhammad Irfan Mu’afi 29119083
    Riva Ayu Hanandiva 29119003

    1. Single or multiple costs of capital?


    Nike has a multiple business segments. Besides footwear, which is a main
    segment, contributes about 62% to Nike’s revenue; Nike’s business segments include:
    apparel (30% of revenue); sport balls, timepieces, eyewear, skates, bats, and other
    equipment designed for sport activities (30% of revenue).
    The risk rate. There are not significantly different between the risk rates that
    every Nike’s segments stand because all of these segments are related to sport
    business. Not only that with the management of Nike, the business activities such as
    customer services, qualify guarantee, marketing, distribution channel, etc all of these
    segments are set in the same state.
    So based on that reason we agree with the use of single cost is sufficient for this
    analysis instead of multiple cost of capital.

    2. Methodology for calculating the cost of capital


    Most companies use a combination of both debt and equity financing. Cost of capital
    can be derived using the WACC by calculating the wighted average of all its capital
    sources:
    WACC = rD x (1-Tc) x (D/V) + rE x (E / V)

    The WACC is used to discount future cash flows. Therefore must be a reflection of
    the company’s future ability to raising capital.
    Cost of capital based on market value not book value
    Cohen is wrong to use book values as the basis for debt and equity weights; the
    market values should be used instead. The reasoning of using market weights to
    estimate WACC is that it is how much it will cause the firm to raise capital today.
    Market value of equity (E) = Current Share Price x Average Shares Outstanding
      = $42.09 x 273.3mil
    = $11,503mil. 

    Market value of debt (D) = $1,291mil

    Thus, Market value weight of equity (We):


    = E / (D+E)
    = 11,503mil / (11,503mil + 1,291mil)
    = 89.9%
    The weight for debt (Wd)
    = D / (D+E)
    = 1,291mil / (11,503mil + 1,291mil)
    = 10.1%.
    3. Cost of debt
    The more appropriate cost of debt can be calculated by using data provided in Exhibit
    4. We can calculate the current yield to maturity of the Nike’s bond to represent
    Nike’s current cost of debt.
    Nd = 95.6
    Face value = 100 (assumed)
    0.0675
    Annual coupon rate = = 0.03375 → Coupon (I) = 100 × 0.03375=3.375
    2
    Bond issued in 07/15/96, its maturity is 07/15/21 => 25-year bond (or the bond was
    issued 5 years ago, because now is year 2001). As result, we have n=2×(25-5) = 40
    (paid semi-annually)
    FV −Nd
    (I + )
    n
    Rd=
    Nd + Pv
    2
    100−95,6
    3,375+(1+ )
    40
    Rd=
    95,6+100
    2
    Rd = 3,563% (semi-annually) => Rd= 3,563 x 2 = 7,13% (annually)
    Cost of debt (after tax): 
    Rdt = Rd x (1-T)
    = 7.13% x (1-38%) = 4.42%

    4. Cost of equity
    We estimated the cost of equity using the captital asset pricing model CAPM.
    Using CAPM for calculate RE:
    RE = RRF + (RM – RRF) x Beta
    RE  = 5.74% + 5.9% x 0.69
    = 9.811%
    Given that
    RRF = 5.74% (20 year yield on us treasuries)
    RM-RRF = 5.9% (geometric mean)
    Beta = 0.69 (most recent beta)

    5. Putting it all together


    Apply in to formula WACC: WACC = Wd x Rdt + We x Re
    WACC = 10.1% x 4.42% + 89.9% x 9.81%
                                             = 0.45% + 8.82%
    = 9.27%
    6. Recommendation
    To discount cash flows in exhibit 2 with the calculated wacc 9,27%, the PV equal
    $58,13 per share, which is more than current market price $42.09. we think than
    current growth is understated, due to that current growth rate used is 6%-7%, it
    much lower than the estimated by manager 8%-10%. So we recommend to BUY.

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