Nike Case
Jordan Hirsch
AF 495
October 18, 2012
Nike
Executive Summary Executive summary In this report I will focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of Nike Inc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost of capital (WACC). In my analysis, I will examine why WACC is important in decision-making and I will show how WACC for Nike Inc. is calculated correctly. Also, I will calculate the company's cost of equity using three different models: the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM) and the Earnings Capitalization Model (EPS/ Price), I can analyze their advantages and disadvantages and finally conclude whether or not an investment in Nike is recommended. My analysis suggests that Nike Inc.'s common stock should be added to the North Point Group's Mutual Fund Portfolio
Calculations
Debt Current Long term $5.4 Notes Payable $855.30 Long Term (discounted) $416.72 $1,277.42 = 10.05% weight
Equity $11,427.44 = 89.95% weight
Cost of Debt YTM on 20 year Nike Inc. Bond = 7.51%
Cost of Equity (CAPM) Rf + B(Rf- Rm) *Rf= 5.74% (20 year yield in US T-bill) *Beta= .8 = 10.46%
WACC Wd*Kd(1-T) + WeKe = 10.05%*7.51% (1-38%) + 89.95*10.46% = 9.8767%
DDM = (Do(1+g)/Po) + g = (.48(1+.055)/$42.09) + .055 = 6.70%
Earnings Capitalization Ratio = E1/Po = 232/42.09 = 5.51%
I don not agree with Joanna Cohen’s WACC calculation. Her amount of debt was correct. I also calculated the same $1,296.6 as she did. However, her equity was off. Cohen used the book value for both debt and equity, while this is ok for calculating debt, the calculation for equity should be done differently. I calculated equity by multiplying the current stock price of
AF 495
October 18, 2012
Nike
Executive Summary Executive summary In this report I will focus on Nike's Inc. Cost of Capital and its financial importance for the company and future investors. The management of Nike Inc. addresses issues both on top-line growth and operating performance. The company's cost of capital is a critical element in such decisions and it is important to estimate precisely the weighted average cost of capital (WACC). In my analysis, I will examine why WACC is important in decision-making and I will show how WACC for Nike Inc. is calculated correctly. Also, I will calculate the company's cost of equity using three different models: the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM) and the Earnings Capitalization Model (EPS/ Price), I can analyze their advantages and disadvantages and finally conclude whether or not an investment in Nike is recommended. My analysis suggests that Nike Inc.'s common stock should be added to the North Point Group's Mutual Fund Portfolio
Calculations
Debt Current Long term $5.4 Notes Payable $855.30 Long Term (discounted) $416.72 $1,277.42 = 10.05% weight
Equity $11,427.44 = 89.95% weight
Cost of Debt YTM on 20 year Nike Inc. Bond = 7.51%
Cost of Equity (CAPM) Rf + B(Rf- Rm) *Rf= 5.74% (20 year yield in US T-bill) *Beta= .8 = 10.46%
WACC Wd*Kd(1-T) + WeKe = 10.05%*7.51% (1-38%) + 89.95*10.46% = 9.8767%
DDM = (Do(1+g)/Po) + g = (.48(1+.055)/$42.09) + .055 = 6.70%
Earnings Capitalization Ratio = E1/Po = 232/42.09 = 5.51%
I don not agree with Joanna Cohen’s WACC calculation. Her amount of debt was correct. I also calculated the same $1,296.6 as she did. However, her equity was off. Cohen used the book value for both debt and equity, while this is ok for calculating debt, the calculation for equity should be done differently. I calculated equity by multiplying the current stock price of