Case Study –Nike, Inc.: Cost of Capital
FIN202a-Spring 2011
1. Please define Weighted Average Cost of Capital (WACC). Write down the WACC formula, and discuss its components.
WACC (Weighted Average Cost of Capital) is a market weighted average, at target leverage, of the cost of after tax debt and equity.
It is a critical input for evaluating investment decision, and typically the discount rate for NPV calculation. And it serves as the benchmark for operating performance, relative to the opportunity cost of capital employed to create value.
Algebraically, it is given by
WACC = [E/(E + D)] *re + [D/(E + D )]*rd * (1-t)
Where WACC= Weighted Average Cost of Capital re = cost of equity rd = cost of debt
E = market
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is not this kind of companies. If we want to use the data of dividends, we need to consider the growth rate and future potential changes of dividend. In a word, we don’t think DDM is fit for Nike’s case.
4. Calculate cost of debt. Use market yields that are presented in Exhibit 4.
Present Value: $95.6
Future Value: $100
Matures: 40
Coupon Rate: 6.75%/2 = 3.375% (Semiannually)
3.375(1 + r)-1 + 3.375 (1 + r)-2 + 3.375 (1 + r)-3 + ...…+ 3.375 (1 + r)-40+100(1 + r)-40 = 95.6 r = 3.5813% (Semiannually)
YTM= Kd= 3.5813%*2= 7.16%
5. Finally calculate WACC. * Please choose either the CAPM estimate or the DDM estimate for cost of equity based on your answer to Question 3. * Risk-free rate: Choose a risk-free rate that is consistent with the life of the asset that is being valued. * Following our discussion in class, use the market values of equity and book values of debt when calculating debt and equity weights.
We use the CAPM to estimate.
Market Value of Equity= 11,427.4 M
Book Value of Debt = 1,296.6 M
Total Capital= 12,724.0 M Formula, WACC = [E/(E+D)] re + [D/(E + D)]rd (1-t) E = 89.89%, D = 10.19%, re = 10.46%, rd = 7.16%, tax rate = 38%
WACC =10.46%*89.89%/(89.89% + 10.19%)+ 7.16%*(1-0.38%)*10.19%/(89.89% + 10.19%) WACC = 9.846%
6. Does your estimate of WACC differ from Cohen’s estimate? Why? What are the mistakes that Ms. Cohen make
The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure.
WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)
n. WACC has market interest rates and market risk aversion, firms debt/equity mix and firm’s business risk which all go to cost of debt and cost of equity which both areas end up at the value.
So in order for the company to make a smart decision, they would have to use the WACC (weighted average cost of capital) in order to determine which way they would go about raising that additional capital, whether it be equity (shares of stocks) or debt (a bond issue).
This assignment will calculate the Weighted Average Cost of Capital of AGL Energy Ltd and gearing, as well as analysing the capital structure of the company. Through this, recommendations can be given to the firm to increase and better manage capital and how it is used. The Weighted Average Cost of Capital (WACC) is a calculation of a firm 's cost of capital. It is the average costs of debt and equity financing, each of which is weighted by its proportional
The weights of debt and equity are calculated using the market values of debt and equity as follows:
WACC = cost of debt + cost of equity (weighted by the % of debt/equity in the capital stack)
5. You now have all the necessary information to calculate the weighted average cost of capital for Dell. Calculate the weighted
Compute the current weighted average cost of capital (WACC) for Home Depot using Eq. 14.6 given their current debt-to-equity ratio.
debt-to-equity ratio to find a cost of equity of 17.12%. Next, we apply the CAPM using the 10-year Treasury for
We must then calculate the CAPM for the cost of equity (see Excel sheet for details):
Weighted Average Cost of Capital (WACC) is a fiscal barometer to gauge a business cost of capital. In this sense, the WACC supplies at discount