Bruner - Nike Case Study

Miquele Smith

Kristy Peltekci

Glenn Garrett

Boulos Frangieh

Antoine Yammine

Jon White

Case # 14: Nike Inc.: The cost of Capital

WACC (generally speaking) shows whether a company’s assets are financed by debt, equity or both. By calculating WACC, we can see how much interest the company needs to pay for every dollar it finances. It is important to estimate the cost of capital because there is a cost for using this capital and the company must try to earn returns in excess of this cost. Company directors and managers set the cost internally to determine the feasibility of purchasing inventory, buying new plants, expansion, mergers and acquisitions, etc.

WACC is the overall rate that the firm must earn on its existing assets to maintain the value of its stock. The cost of capital reflects the returns available to alternative investments of similar risk. It is important for investors to estimate a firm’s cost of capital because it provides a benchmark for corporate companies against other capital market alternatives.

The WACC is set by investors to determine whether or not it is worth

investing in the potential company. If the firm in question is earning an excess of its cost of capital, then it is a healthy investment. However, if the firm is not earning in excess of its cost of capital, it is not creating economic profit or value, making it unappealing for any potential investors.

2. The WACC

Capital Sources: As of May 31st 2001

Debt

Current portion of long-term debt: 5.4

Notes Payable: 855.3

Long term debt: 435.9

______________

Total debt: 1296.6

Equity +3494.5

=========

Total Capital $4791.1

(27% of total capital is debt and the other 73% is equity).

Cost of equity:

CAPM= Risk free rate + beta (market risk premium).

= 5.74%+ .8 (5.90%) = 10.46%

Advantages

* It helps you determine what return you deserve for putting your money at risk

* CAPM takes into account...