Nike Case Study

Nike, Inc.: Cost of Capital Case Analysis

Tammy Ashland

Delano Bright

Jacquelyn Burns

Thelma Cortes

Danny Dyess

Kari Gaswick

Marianne Griffiths

Chadron State College

April 24, 2011

Importance of Weighted Average Cost of Capital

Corporations create value for shareholders by earning a return on the invested capital that is above the cost of that capital. Weighted Average Cost of Capital (WACC) is the total cost of the capital used to finance or purchase a business (ValuAdder, 2002-2011). It is computed from the respective costs of debt and equity and their relative proportion in the deal structure. (ValuAdder, 2002-2011). WACC is an expression of this cost and is used to see if certain intended investments, strategies, projects, or purchases are worthwhile to undertake. WACC is expressed as a percentage, like interest, and reflects the expected average future cost of funds, over the long run (Gitman, 2009). If a company works with a WACC of 12%, this means only those investments with a return higher than 12% should be pursued.

The cost of capital determines how a company can raise money through a stock issue, borrowing, or a mix of the two (Investopedia, Cost of Capital, 2011). This is the rate of return that a firm would receive if it invested in a different vehicle with similar risk (Investopedia, Cost of Capital, 2011). The cost of capital for any investment, whether for an entire company or for a project, is the rate of return capital providers would expect to receive if they would invest their capital elsewhere. In other words, the cost of capital is an opportunity cost. The WACC estimates the blended required rate of return for all investors, both equity and debt, in the subject company. One thing to remember is that the relative weightings of equity and debt or other capital components are based on the market values of each component, not on the book values.

It is important to estimate a firm’s cost of...