According to Ms. Cohen’s analysis, the weighted average cost of capital is 8.4% for Nike. This WACC calculation was based on the book value cost of debt of 2.7% and the market value cost of equity of 10.3%. The weight of debt was 27% and weight of equity of 73%, calculated based on the book value as well. We disagree with Ms. Cohen's WACC calculation, however, since we found numerous errors in the calculations. As we recalculated the WACC, 9.25% should serve as an accurate discount rate for any investment decisions on Nike. Following are the errors we observed in Cohen’s calculation:
First of all, MS. Cohen used Book value weights rather than market value weights. Upon making a decision, ...view middle of the document...
Notes Payable 855.3
Long-term debt 435.9
$ 1296.6→ 27.0% of total capital
Equity $ 3494.5→ 73.0% of total capital
V= $ 4791.10
Since she used “Total Shareholders’ Equity” to find her weight of equity, we found this to be inaccurate. We recalculated the weight of Equity by multiplying the current stock price and shares outstanding.
Market Value of Equity= $42.09*271.50 = $11427.43
Market Value of Debt =$ 435.9(95.6) +5.4+855.3=1277.42
Weight of Equity =$11427.43/12704.86= .90%
Weight of Debt = $1277.42/12704.86= .10%
Management’s Correction: Cost of Debt
Ms. Cohen’s estimate of Nike’s cost of debt is 4.3%, which our management team found to be inaccurate by the fact that she did not factor in the current yield on the publicly traded Nike Debt.
Ms. Cohen calculated:
2000 & 2001 Book Values
1444.6+ 1296.6 =2741.2/2 =1370.6/58.7= 4.3%
Cost of Debt:
Number of Years (2021-2001)*2= 40
Payments 6.75/100*1000/2= 3.375
Future value = 100
Present Value= 95.6
Rd=7.17(1-.38) = 4.45%
Management’s Correction: Cost of Equity
Ms. Cohen used the historic beta to calculate her second portion of cost of equity. Here, we used the historical prices to find the correlation between the returns of Nike and S&P 500. The dates we...