Nike Wacc - 1068 Words

What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firm’s stock. 1.2 Analysis of Johanna Cohen’s calculation We analyzed the process of Johanna Cohen’s calculation, and found some flaws we believe caused†¦show more content†¦3.2 Calculating the costs of equity by DDM, and its advantages amp; disadvantages i. Calculation (based on EXIHIBIT 4):: Based on the dividend discount model, P0 = D0 * (1+g) / (k – g), then we get the return rate (the cost of equity) k = D0 * (1+g) / P0 + g = 0.48 * (1 + 0.055) / 42.09 + 0.055 = 6.7% ii. Advantages First, DDM fully considers the time value of consistent cash flow of an investment. Second, it is pretty easy to get the necessary historical data. Third DDM is flexible enough for the adjustment of any future situation. Fourth, once the growth pattern is confirmed, it is very straightforward to get the discount rate of assessing an investment. iii. Disadvantages First, without enough consideration of risk cost, DDM may underestimate the equity cost. Second, all of the data is based on historical record, so the result is not reliable considering of the future situations. Third, with the predetermined growth rate, it is obviously practical for the stock investors to estimate the possible profit, but may mislead the stock issuing firm from a better budgeting decisio n to a comparatively unsubstantial investment. 3.3 Calculating the costs of equity by the earnings capitalization ratio, and its advantages amp; disadvantages i. Calculation (based on EXIHIBIT 1amp;4) According to the earnings capitalization model, we have cost of equity = E1 / P0 = 2.16 / 42.09 = 5.13% ii. AdvantagesShow MoreRelatedNike Wacc Case Study2281 Words   |  10 PagesWhat is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not? 2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions. 3. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? 4. What should Kimi Ford recommend regarding an investment in Nike? 2 CaseRead MoreCase Study on Nike1252 Words   |  6 PagesCase Study Nike Introduction Good morning ladies and gentlemen and thank for taking the time to meet with us. Nike was founded on January 25, 1964 as Blue Ribbon Sports by Bill Bowerman and Philip Knight. The company officially became Nike, Inc. on May 30, 1978. Nike has various products which include footwear as well as other apparel that compliment the former. This accounts for 92 percent of the company’s revenue. The other 8 percent comes from equipment and non Nike brand products, such as ColeRead MoreNike: Globalizing the Sportswear Industry1250 Words   |  5 PagesNike case Grachya Ovsepyan Alexander Kopenkin 2011 Nike – Globalizing the Sportswear Industry 1. Evaluate Nike’s business strategy. Does Nike have a sustainable competitive advantage? 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On July 28,2011 Nike Inc. held a analyst’s meeting to disclose their fiscal year 2001 as well as to revitalize the company who wasn’t performing well. Thus, the meeting showed that Nike Inc. experienced some difficulties during the past years. First, Nike Inc. revenues have reached a plateauRead MoreNike Inc. - Cost of Capital1368 Words   |  6 PagesWhat is he WACC and why is it so important to estimate a firms cost of capital? The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt asRead MoreNike1217 Words   |  5 Pages13/3/2013 Nike, Inc. Cost of Capital 1 Discussion Questions †¢ What is the WACC and why is it important to estimate a firm’s cost of capital? What does it represent? Is the WACC set by investors or by managers? †¢ Do you agree with Joanna Cohen’s WACC calculation? Why or why not? If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. What mistakes did Joanna Cohen make in her analysis? Which method is best for calculatingRead MoreNike Case1172 Words   |  5 PagesNike 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 theRead MoreNike Case Study1542 Words   |  7 Pagesin the stocks of Nike for the fund that she manages. †¢ Ford should base her decision on data on the company which were disclosed in the 2001 fiscal reports. While Nike management addressed several issues that are causing the decrease in market sales and prices of stocks, management presented its plans to improve and perform better. †¢ Third party sources also gave their opinions on whether the stock was a sound investment. WACC CALCULATION: Cost of Capital Calculations: Nike Inc Cohen calculatedRead MoreNike Inc Cost of Capital Case Study917 Words   |  4 PagesNike Inc. Case Number 2 Nike Incorporated’s cost of capital is a vital element when addressing opportunities regarding top-line growth and operating performance. Weighted Average Costs of Capital (WACC) is an essential estimation that is needed in order to determine the amount of interest that will be paid for each additional dollar financed. This translates to be the minimum overall required rate of return that the firm will keep. We disagree with Johanna Cohen’s assessment of Nike due to two