Nike, Inc

1. 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?

The cost of capital, otherwise known as opportunity cost, is the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. It is important to estimate a firm’s cost of capital because it must be known whether to invest in a project or to invest in a company. Doing this can also help predict risk that could happen to the company. To sum this all up, the importance of estimating a firm’s cost of capital is to help investors diversify their investment, reduce risk in investments, and do maximize profits. Cost of capital represents WACC (Weighted Average Cost of Capital). The required return will reflect the risk of the investment and the return of alternatives. WACC is the sum of the cost of debt and the cost of equity and is calculated by using the Dividend Discount Model, the Earning Capitalization Model or CAPM. If a company doesn’t have dividends, they are more likely to use the CAPM model. The WACC is set my investors, not by managers. Investors set WACC when they calculate and find out whether or whether not to invest or reject a company or a project. Managers just listen to the market and react by determining whether to invest or reject a project or company.

2. What mistakes did Joanna Cohen make in her analysis if any? If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. What was your estimate of WACC?

When looking at Joanna Cohen’s calculations regarding the WACC, we didn’t agree on 3 aspects that she used. The first being that when she computed the weighted or proportions of debt and equity, she used the book value rather than the market value. The book values are historical data, not current ones; the market recalculates the values of each type of capital on a continuous basis,...