Nike Case

What can the historical income statements (case Exhibit 1) and balance sheets (case Exhibit 2) tell you about the financial health and current condition of Krispy Kreme Doughnuts, Inc.?

1. What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?

WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances. A firm's WACC is the overall required return on the firm as a whole. Also, WACC is the appropriate discount rate to use in stock valuation. It also is a critical input for evaluating investment decisions.

I do not agree with Joanna Cohen’s WACC calculation. Joanna used the book value of equity when she should have used the market value of equity, which is equal to the number of outstanding shares multiplied by the price. This will change her weight of debt calculation. The weights of the costs, Wd (weight of debt) and We (weight of equity), are very important in calculating WACC as they show the company's capital structure. In calculating that part of the equation, Joanna Cohen used the book values of debt and equity where the market values when the market value provide more accurate results. The market value of equity is found by multiplying the stock price of Nike Inc. by the number of shares outstanding.

2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions.

WACC = [E/ (E + D)] *re + [D/ (E + D )]*rd * (1-t)

WACC= Weighted Average Cost of Capital

re = cost of equity

rd = cost of debt

E = market value of equity

D = Market value of debt

t = tax rate = .038

Market Value of Equity (E)

E = Stock Price X Number of Shares Outstanding

= $42.09 X 271.5 = $11,427.44

This figure is much different...