NIke solutions
Appendix I
C1: Equity = Stock Price x Number of Shares Outstanding
= $42.09 X 271.5
= $11,427.435 million
C2: Using Adjusted Beta formula:
Adjusted Beta = 0.67* historical Beta + 0.33 = 0.67* 0.69 +0.33=0.79
C3: Using CAPM formula:
KE = Krf + ß (Km-Krf) = 3.59%+0.79*6.7%=8.89%
C4: Using rearranged DGM formula:
KE =D1/P0 +g= 0.48(1+5.5%)/42.09 +5.5%=6.7%
C5: Using redeemable bond formula:
KD: 95.6= 100/ (1+KD/2)40 + 3.375(1-0.38)/(1+KD/2)n
KD=4.52%
C6: Using WACC formula:
Rwacc =4.52*10.19% + 8.89*89.81% = 8.44%
C7: average dividend growth rate: g = [0+12.5++ 20+12+8]/4 %=8%
(Assumption: In this calculation, the growth rates significantly higher than 20% and negative figure have been ignored.)
C8: Using CAPM:
KE’=3.2%+0.91*5.5%=8.21%
C9: Using DGM formula:
P’=D1/ (KE’-g) =1.06*(1+8%)/(8.21%-8%)=$545
In Nike’s case, when Joanna Cohen calculated the WACC of Nike, she made several mistakes and led to a wrong estimate of the cost of capital. The first mistake comes to the book value of equity used in calculating WD. Nike became a publicly traded company since December 2, 1980, the share price has changed significantly during 20-year’s time. So, the market value of equity should be used instead of book value. Then, Cohen calculates the cost of debt by taking total interest expense for the year 2001 and dividing it by the company's average debt balance. This is an approximation for the true cost of the debt, but is too inaccurate and may not reflect Nike’s current or future cost of debt. Thirdly, Cohen obtained the corporate tax rate 38% which is used to calculate the adjusted cost of debt by adding state taxes of 3% to the U.S. statutory tax rate 35%. In WACC calculation, marginal tax rate should be used as a corporate tax rate for the future estimate. Practically, if a company has a lower average effective tax rate which are generated from the average of past years actual taxes paid divided by earnings before taxes than the marginal tax rate, this will be more
C1: Equity = Stock Price x Number of Shares Outstanding
= $42.09 X 271.5
= $11,427.435 million
C2: Using Adjusted Beta formula:
Adjusted Beta = 0.67* historical Beta + 0.33 = 0.67* 0.69 +0.33=0.79
C3: Using CAPM formula:
KE = Krf + ß (Km-Krf) = 3.59%+0.79*6.7%=8.89%
C4: Using rearranged DGM formula:
KE =D1/P0 +g= 0.48(1+5.5%)/42.09 +5.5%=6.7%
C5: Using redeemable bond formula:
KD: 95.6= 100/ (1+KD/2)40 + 3.375(1-0.38)/(1+KD/2)n
KD=4.52%
C6: Using WACC formula:
Rwacc =4.52*10.19% + 8.89*89.81% = 8.44%
C7: average dividend growth rate: g = [0+12.5++ 20+12+8]/4 %=8%
(Assumption: In this calculation, the growth rates significantly higher than 20% and negative figure have been ignored.)
C8: Using CAPM:
KE’=3.2%+0.91*5.5%=8.21%
C9: Using DGM formula:
P’=D1/ (KE’-g) =1.06*(1+8%)/(8.21%-8%)=$545
In Nike’s case, when Joanna Cohen calculated the WACC of Nike, she made several mistakes and led to a wrong estimate of the cost of capital. The first mistake comes to the book value of equity used in calculating WD. Nike became a publicly traded company since December 2, 1980, the share price has changed significantly during 20-year’s time. So, the market value of equity should be used instead of book value. Then, Cohen calculates the cost of debt by taking total interest expense for the year 2001 and dividing it by the company's average debt balance. This is an approximation for the true cost of the debt, but is too inaccurate and may not reflect Nike’s current or future cost of debt. Thirdly, Cohen obtained the corporate tax rate 38% which is used to calculate the adjusted cost of debt by adding state taxes of 3% to the U.S. statutory tax rate 35%. In WACC calculation, marginal tax rate should be used as a corporate tax rate for the future estimate. Practically, if a company has a lower average effective tax rate which are generated from the average of past years actual taxes paid divided by earnings before taxes than the marginal tax rate, this will be more