Submitted by: Submitted by wanfadillah
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Category: Business and Industry
Date Submitted: 12/11/2011 06:31 AM
Nike inc:cost of capital
INTRODUCTION
Background:
Kimi Ford, a portfolio manager of a large mutual fund management firm, is looking into the viability of investing in the stocks of Nike for the fund that she manages. Ford should base her decision on data on the company which were disclosed in the 2001 fiscal reports. While Nike management addressed several issues that are causing the decrease in market sales and prices of stocks, management presented its plans to improve and perform better. Generally, the case issue is to examine if the share price of Nike is undervalue or overvalue for guide investors to buy or not and the common stock of Nike Inc should be added to the North Point Group’s Mutual Fund Portfolio or not.
What is WACC? And why is it important to estimate a firm’s cost of capital?
The weighted average cost of capital (WACC) is the rate (expressed as a percentage, like interest) that accompany is expected to pay to debt holders (cost of debt) and shareholders (cost of equity) to finance its assets. It is the minimum return that a company must earn on existing asset base to satisfy its creditors, owners, and other providers of capital. Companies raise money from a number of sources: common equity, preferred equity, straight debt, convertible debt, exchangeable debt, warrants, and options, pension liabilities, executive stock options, governmental subsidies, and so on. Different securities are expected to generate different returns. WACC is calculated taking into account the relative weights of each component of the capital structure- debt and equity, and is used to see if the investment is worthwhile to undertake.
The WACC is set by the investors (or markets), not by managers. So we can only estimate it.
Issues:
Single cost or Multiple Cost?
WACC:
Value of equity
Value of debt
Weights of cost...