Nike Inc: Cost of Capital Essay

The Weighted Average Cost of Capital (WACC) is the overall necessary rate of return on a firm as a whole. It is important to calculate a firms personify of pileus in order to determine the feasibility of a particular coronation for a firm.I do not agree with Joanna Cohens WACC calculation. She cypher value of right, value of debt, terms of equity, and cost of debt all in betterly. For value of equity, Joanna scarce used the number stated on the balance sheet rather of work outing the current stock price by the number of outstanding shares. The correct calculation is $42.09 x 271.5M = $11,427.435M. The correct method of calculating the value of debt is to multiply the price of publicly traded bonds by the amount of debt outstanding. This calculation results in 95.60% x $1296.6M = $1,239.550M. The sum of debt and equity is equal to $12,666.985M.Therefore, the weight of equity is 0.902 and the weight of debt is 0.098. In order to determine the cost of debt, the yield to maturi ty of the debt must be calculated. Using a financial calculator (N=30, PV=-$95.60, PMT=$3.375, FV=$100), the YTM is equal to 7.24%. This is the cost of debt. The cost of equity good deal be determined employ the Capital addition Pricing Model (CAPM). Joanna was correct in using the 20-year yield on U.S. treasuries as her risk-free rate and was also correct in using 5.90% as her risk premium. However, she should keep back only used the most new years beta instead of using an average of five-fold years. The correct calculation is 5.74% + 0.83(5.90%) = 10.64%. This is cost of equity. Using a 38% value rate, we can now calculate the WACC. WACC = 90.2%(10.64%) + 9.80%(7.24%)(1-38%) = 10.03%Using the Dividend Discount Model, the cost of equity can be calculated as the sum of the dividend yield and the dividend addition rate. In this case, it is ($0.48/$42.09) + 5.50% = 6.64%. Using the earnings capitalization ratio, the cost of equity can be arrived at by dividing the projected ear nings per share by the current market price of the stock. Therefore, $2.32/$42.09 = 5.51% is the cost of equity using this model.The service of using CAPM is that it is relatively unprovoked to calculate, but a disadvantage is that it assumes double-dyed(a) asset valuation, which does not always happen in reality. An advantage of the dividend give notice model is that it allows investors to value stocks based on the dividends they pay and it is also easy to calculate. However, not all companies pay dividends so another method would have to be used for those firms.Kimi Ford concluded that at discount rank below 11.17%, Nikes stock would be undervalued. At Nikes cost of capital rate of 10.03%, Kimi Ford should invest in the company.