Nike Inc Case

Nike Inc. Case 1. What is the WACC and why is it important to estimate a firm’s cost of capital? WACC is weighted average cost of capital, which is the expected rate of return on average from all the company’s existing debts and securities. It takes into account all different types of financing in the company’s capital structure. The reason it is important to estimate WACC is because it measures what it costs the firm to take on a project based on its current Debt and Equity mix. When the firm decides to take on a project it needs to discount the future cash flows of the project by the company’s WACC to determine whether or not to take the project on. High WACC generally indicates more risk since the company pays more for its capital. It is generally used by managers to decide if a new investment project is worthwhile. All developing firms require more capital to accommodate more demand. As a result, the firm needs more capital. Capital is raised through debt, preferred stock and common equity. Debt is acquired either through bonds or through borrowing from banks. The common equity form of the capital can be raised through either retaining the earnings and reinvest in the future company development or it can be raised through issuing common stock. The preferred stock is the least favorite method to raise capital. While interest payments provide the earnings for holders of debt, the cost of equity is the opportunity cost demanded by investors for making the funds available for the company instead of pursuing other investment opportunities. The factors that are beyond the control of the firm, referred to as external factors including the interest rate, federal tax policies, and nature of economy plays a major role impact in cost of capital. The internal factors including the riskiness of the project, the firm’s investment and financial policies, and the type of capital to use also have an impact on the cost of capital. A mutual fund organization was