CF Nike Write up 1
Case Study on Nike Inc.
What is the WACC and why is it important to estimate a firm’s cost of capital?
The WACC is a firm’s overall cost of capital, taking into account the weighted average of its equity and debt costs of capital. A firm’s WACC is the minimum return (hurdle rate) required by its capital providers to stay invested.
Therefore managers of a firm should only invest in projects that generate returns exceeding the firm’s cost of capital. For the company’s owners the WACC is the minimum rate that compensates for the risks taken by investing in a firm. A firm’s WACC is the overall required return on the firm as a whole.
Thus it is often used by managers to determine the economic feasibility of any capital investments.
The WACC is calculated by multiplying the relative weights of debt and capital with its respective cost:
MVe = Market Value of equity; Re = Cost of equity; MVd = Market Value of debt; Rd = Cost of debt; t = Corporate Tax Rate
Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
I. Single or Multiple Costs of Capital
We follow Joanna’s argumentation to use a single cost of capital. Aside from the current plans of
Nike’s management, to develop more midpriced footwear and to increase sales in the apparel line, the two business segments experience similar risks in the short term. Furthermore both product lines are sold through the same marketing and distribution channels.
In the future we can imagine applying a multiple cost of capital approach, because of Nike’s ambitions to increase the market share in the midpriced segment for footwear. Since a differentiation between high- and midpriced product could also lead to different risks for sales and distribution (e.g. in a recession / economic downturn period when expensive products might be exchanged for midpriced products by customers).
II. Methodology for calculating the Cost of Capital: WACC
a) Value of equity: For the calculation of the value of equity Joanna used the current
What is the WACC and why is it important to estimate a firm’s cost of capital?
The WACC is a firm’s overall cost of capital, taking into account the weighted average of its equity and debt costs of capital. A firm’s WACC is the minimum return (hurdle rate) required by its capital providers to stay invested.
Therefore managers of a firm should only invest in projects that generate returns exceeding the firm’s cost of capital. For the company’s owners the WACC is the minimum rate that compensates for the risks taken by investing in a firm. A firm’s WACC is the overall required return on the firm as a whole.
Thus it is often used by managers to determine the economic feasibility of any capital investments.
The WACC is calculated by multiplying the relative weights of debt and capital with its respective cost:
MVe = Market Value of equity; Re = Cost of equity; MVd = Market Value of debt; Rd = Cost of debt; t = Corporate Tax Rate
Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
I. Single or Multiple Costs of Capital
We follow Joanna’s argumentation to use a single cost of capital. Aside from the current plans of
Nike’s management, to develop more midpriced footwear and to increase sales in the apparel line, the two business segments experience similar risks in the short term. Furthermore both product lines are sold through the same marketing and distribution channels.
In the future we can imagine applying a multiple cost of capital approach, because of Nike’s ambitions to increase the market share in the midpriced segment for footwear. Since a differentiation between high- and midpriced product could also lead to different risks for sales and distribution (e.g. in a recession / economic downturn period when expensive products might be exchanged for midpriced products by customers).
II. Methodology for calculating the Cost of Capital: WACC
a) Value of equity: For the calculation of the value of equity Joanna used the current