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Nike Case Study:
If the Shoe Fits…
This paper studies the case study entitled: Nike, Inc.: Cost of Capital. Our purpose is to determine the following:
* What is the Weighted Average Cost of Capital and why it is important to measure a firm’s WACC.
* Whether we agree with the WACC computed in the case study, and explain our reasons.
* If we are not in agreement, to calculate the WACC for Nike, Inc. and justify our assumptions.
* Calculate the cost of capital for Nike, Inc. using the Capital Asset Pricing Model (CAPM), the Dividend Discount Model (DDM), and the Earnings Capitalization Ratio (ECR), explaining the advantages and disadvantages of each.
* Develop a conclusion as to what the investment advisor in the case study should recommend regarding an investment in Nike, Inc.
We will accomplish these by examining in detail the assumptions made in the case study to compute the WACC, recommending changes as needed, and re-computing the WACC using more appropriate figures. Since the WACC depends on the CAPM as one of its source numbers, we will examine the assumptions and methods used in the computation of the CAPM as well. We will then develop a reasonable set of assumptions from which to calculate the DDM and the ECR, explaining and supporting our work, and highlighting the relative advantages and disadvantages of each in estimating a firm’s cost of capital. All figures are in millions of dollars unless otherwise noted.
ASSUMPTIONS AND RATIONALE
The weighted average cost of capital (WACC) uses the cost of each component of financing (debt, common stock, preferred stock, etc.) and combines those individual constituents into a single overall measure of the firm’s total cost of capital, with each component weighted based on its proportionate contribution to the capital of the firm (What is "WACC" or the Weighted Average Cost of Capital? (n.d.)). According to the text, when computing the WACC of a firm, it is preferable...
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