Nike, Inc. is an American company that is involved into the designing, development and selling of shoes, apparel, equipment, accessories and services. It is one of largest world’s suppliers and manufacturer of sports equipment in the world. In this case study report, I will analyze the cost of capitals and make a comparison with Joanna Cohen’s result with my calculation, then get further analysis.
From the company’s point of view, the cost of capital is a term used in the field of financial investment to refer to the cost of a company’s fund. From the investor’s point of view, the cost of capital is the shareholder’s required return on a portfolio of company’s securities. We can evaluate new projects that a company ready to launch. It is a very important benchmark for us to evaluate an investing project. I also need to calculate the WAAC (required return), which is the weighted average cost of capital. It is the rate that a company is expected to pay on average to all its security holders to finance its assets. We can use WACC to see if the investment projects available to them are worthwhile to undertake.
There are several methods to calculate the WACC, which are Dividend Discount Model, Earnings Capitalization Model and CAPM Model. Because there is no substantial dividend, I won’t use DDM method. Moreover, because it ignores the growth of company, I won’t use ECM methods. I will use CAPM methods to calculate WWAC of Nike, which is the same method as Joanna Cohen’s.
I will illustrate the procedure of calculating WACC in the following paragraph. The WACC can be calculated by the formula: WACC = (Percentage of debt) x (Cost of debt) + (Percentage of equity) x (Cost of equity). I don’t agree entirely on Cohen’s calculation, because she has some big mistake in calculating in the following aspects:
1. She shouldn’t use book values to weight debt and equity. WACC is the expected rate of return that the market requires to satisfy investors. She chooses the wrong base. WACC should be measured with market value rather than book value.
2. She shouldn’t use historical data in calculating the cost of debt. WACC is to reflect company’s current and future ability to get funds. However, she failed to reflect the future perspectives.
So I derive my results in the following procedure:
1. Value of