Nike Case 14

According to Ms. Cohen’s analysis, the weighted average cost of capital is 8.4% for Nike. This WACC calculation was based on the book value cost of debt of 2.7% and the market value cost of equity of 10.3%. The weight of debt was 27% and weight of equity of 73%, calculated based on the book value as well. We disagree with Ms. Cohen's WACC calculation, however, since we found numerous errors in the calculations. As we recalculated the WACC, 9.25% should serve as an accurate discount rate for any investment decisions on Nike. Following are the errors we observed in Cohen’s calculation:

First of all, MS. Cohen used Book value weights rather than market value weights. Upon making a decision, whether, to accept or decline an investment for a volatile company as Nike, the analyst should incorporate the most recent data available in preparing calculations for the company.

Secondly, Ms. Cohen used the historical average beta. Here, our management team had referred to Yahoo finance for Nike’s past five year historical return. With the data, we ran the regression analysis and found the correlation between Nike’s and S&P 500’s returns, which is to be the Beta.

Last but not least, Ms. Cohen's cost of debt is also based on historical values. We recalculated this information as the bond's yield to maturity based on the current bond information given.

In recalculating WACC, our management team also noticed additional areas that can be improved, such as implementing the geometric mean risk premium or arithmetic risk premium based on the business condition of the company. Since Nike's stock is volatile, we decided to use the geometric risk premium in calculating the cost of equity. Exhibit 1 show our steps in calculating WACC

Exhibit 1.

Management’s Correction: weights of Debt and Equity

The first error that Ms. Cohen made was that she incorporated the Book Value Weights of debt and equity:

Capital Sources...