Nike's Cost of Debt and Equity
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Table of Contents Cost of Capital 2 Value of Equity 2 Cost of Equity 2 CAPM Model 2 Dividend Growth Model 3 Value of Debt 3 Cost of Debt 4 WACC (Weighted Average Cost of Capital) 4 Comparison to Joanna Cohen’s Analysis 4 Financial Statement Analysis 5 Nike Inc. 5 Financial Ratios 6 Leverage Ratios 6 Efficiency Ratios 6 Liquidity Ratios 7 Profitability Ratios 7 Valuation Ratios 7 Conclusion 8 Appendix A – Ratio Calculation 9 Leverage Ratios 9 Efficiency Ratios 9 Liquidity Ratios 9 Profitability Ratios 10 Valuation Ratios 10
Cost of Capital
Value of Equity
Cohen's calculation considered the book values to calculate the proportion of equity for calculating the value of WACC which should only be done if the target or market values are not available. In order to determine a more realistic cost of equity, it is recommended to use the market value. The current market share price of Nike as of 2001 is $42.09 and there are 271.5 total shares outstanding.
Therefore the market value of equity is:
Current share price * Average shares outstanding: (42.09 * 271.5) = $11,427.44 million
This figure is much higher than the book value of $3,494.5 million that Cohen used to calculate the value of equity.
Cost of Equity
There are two approaches that can be used to calculate the cost of equity: the Dividend Growth Model or the CAPM model.
CAPM Model
The formula to calculate CAPM considers three important variables, the Risk Free Rate (RF), the Market Risk Premium (RM - RF) and the company Beta (β). 1. Risk Free Rate: RF = 5.74 (Current yield on 20-year U.S. treasuries)
The maturity period for Nike’s current publicly traded debt is 25 years. The closest available information on current risk free yields is for 20-year bonds. 2. Market Risk Premium: (RM – RF) = 5.9% (Geometric mean)
Here the geometric mean is used instead of the arithmetic mean as it is better long-term measure of the market risk premium. 3. Company Beta: β = 0.80 (Average)
The
Table of Contents Cost of Capital 2 Value of Equity 2 Cost of Equity 2 CAPM Model 2 Dividend Growth Model 3 Value of Debt 3 Cost of Debt 4 WACC (Weighted Average Cost of Capital) 4 Comparison to Joanna Cohen’s Analysis 4 Financial Statement Analysis 5 Nike Inc. 5 Financial Ratios 6 Leverage Ratios 6 Efficiency Ratios 6 Liquidity Ratios 7 Profitability Ratios 7 Valuation Ratios 7 Conclusion 8 Appendix A – Ratio Calculation 9 Leverage Ratios 9 Efficiency Ratios 9 Liquidity Ratios 9 Profitability Ratios 10 Valuation Ratios 10
Cost of Capital
Value of Equity
Cohen's calculation considered the book values to calculate the proportion of equity for calculating the value of WACC which should only be done if the target or market values are not available. In order to determine a more realistic cost of equity, it is recommended to use the market value. The current market share price of Nike as of 2001 is $42.09 and there are 271.5 total shares outstanding.
Therefore the market value of equity is:
Current share price * Average shares outstanding: (42.09 * 271.5) = $11,427.44 million
This figure is much higher than the book value of $3,494.5 million that Cohen used to calculate the value of equity.
Cost of Equity
There are two approaches that can be used to calculate the cost of equity: the Dividend Growth Model or the CAPM model.
CAPM Model
The formula to calculate CAPM considers three important variables, the Risk Free Rate (RF), the Market Risk Premium (RM - RF) and the company Beta (β). 1. Risk Free Rate: RF = 5.74 (Current yield on 20-year U.S. treasuries)
The maturity period for Nike’s current publicly traded debt is 25 years. The closest available information on current risk free yields is for 20-year bonds. 2. Market Risk Premium: (RM – RF) = 5.9% (Geometric mean)
Here the geometric mean is used instead of the arithmetic mean as it is better long-term measure of the market risk premium. 3. Company Beta: β = 0.80 (Average)
The