Nike Inc. - Cost of Capital - 1368 Words

What is he WACC and why is it so important to estimate a firms cost of capital? The WACC (weighted average cost of capital) is a percentage figure resulting from a calculation method by which the adequate cost of capital of a firm is expressed. It considers the composition of a company’s funding, be it debt or equity. A corporation whose source of funding is equity by 100 percent will have a WACC equal to the cost of equity. By contrast, a levered company will have to reflect the cost of debt as well. The WACC takes their respective quantitative contributions to the entire amount of funding, serving hence as an allocation base, into account. As there is a direct relationship between the two portions, debt and equity, in order to calculate†¦show more content†¦The cost of debt (cd) as used by the WACC refers to the costs a company incures by raising parts of its funds through debt. As debt has a prior position to equity in terms of claiming it is in most cases supposed to be â€Å"cheaper† than equity (moreover the debt costs depend on the leverage). The overall market value of debt of a company can be retrieved by adding all debt positions less excess cash and short-term investments (net debt). Expressed as a relative portion of entire assets and multiplied by the cost of debt it yields the contribution to the WACC figure. By contrast, the cost of equity (ce) is a quantitative result which can be derived from the CAPM e.g. (capital asset pricing model). It suggests that the cost of equity is equal to the sum of the risk-free rate and a risk premium of an average market portfolio adjusted for a company-specific factor beta. This beta reflects the risk associated with the company whereas a beta of 1,0 is equal to the market risk. The importance of estimating the WACC properly becomes evident when using it for the valuation of a company. There is a direct and strong correlation between the exact cost of capital and the preciseness of resulting figures. Future free cash flows of orders of magnitudes are discounted sometimes. Hence, the resulting present value is subject to enormous sensitivity and an arbitrary rounding off of the second decimal as in the NIKE case isShow MoreRelatedNike Inc Cost of Capital2974 Words   |  12 PagesIntroduction Kimi Ford is a portfolio manager at NorthPoint Group, a mutual-fund management firm. She is evaluating Nike, Inc. (â€Å"Nike†) to potentially buy shares of their stock for the fund she manages, the NorthPoint Large-Cap Fund. This fund mostly invests in Fortune 500 companies, with an emphasis on value investing. This Fund has performed well over the last 18 months despite the decline in the stock market. Ford has done a significant amount of research through analysts’ reportsRead MoreCase Analysis of Nike, Inc.: Cost of Capital731 Words   |  3 PagesApparently, the issue of Nike’s case is to control and check the calculation cost of capital done by Joanna Cohen who is the assistant of a portfolio manager at NorthPoint Group. But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) too. Because her assumptions such as Revenue Growth Rate, COGS / Sales, S A / Sales, Current Assets / Sales, and Current Liability / Sales have been adopted from previous incomeRead MoreNike Inc Cost of Capital Case Study917 Words   |  4 PagesNike Inc. Case Number 2 Nike Incorporated’s cost of capital is a vital element when addressing opportunities regarding top-line growth and operating performance. Weighted Average Costs of Capital (WACC) is an essential estimation that is needed in order to determine the amount of interest that will be paid for each additional dollar financed. This translates to be the minimum overall required rate of return that the firm will keep. We disagree with Johanna Cohen’s assessment of Nike due to twoRead MoreCase Study –Nike, Inc.: Cost of Capital Essay718 Words   |  3 PagesCase 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 toRead MoreNike Case Study1542 Words   |  7 Pagesthe 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. †¢ Third party sources also gave their opinions on whether the stock was a sound investment. WACC CALCULATION: Cost of Capital Calculations: Nike Inc Cohen calculatedRead MoreNike1200 Words   |  5 PagesJOHN MOLSON SCHOOL OF BUSINESS | CASE ANALYSIS: NIKE INC. – COST OF CAPITAL | FOR PROF. EDWARD WONG | | ARUN KUMAR DURAIRAJ – 27416008 NIDISH PC – 27254423 VIPUL PARTI – 27246307 | 12/3/2015 | | EvaluationRead MoreA Portfolio Managers Analysis of Nike Inc. Essay1029 Words   |  5 Pagesdecision to make while looking at Nike Inc. financials: whether Kimi should buy Nike shares or not for the fund Group she was working for. Kimi needed to consider all aspects of Nike Inc. financial position. On July 28,2011 Nike Inc. held a analyst’s meeting to disclose their fiscal year 2001 as well as to revitalize the company who wasn’t performing well. Thus, the meeting showed that Nike Inc. experienced some difficulties during the past years. First, Nike Inc. revenues have reached a plateau sinceRead MoreEssay about Cost of Capital Nike974 Words   |  4 Pagesï » ¿Case Analysis of Nike, Inc.: Cost of Capital Apparently, the issue of Nike’s case is to control and check the calculation cost of capital done by Joanna Cohen who is the assistant of a portfolio manager at NorthPoint Group. But I am willing to tell you that it can be a complex case in which we can doubt about sensitivity analysis done by Kimi Ford (portfolio manager) because her assumptions such as Revenue Growth Rate, COGS / Sales,  S A / Sales, Current Assets / Sales, and Current LiabilityRead MoreEssay on Nike Cost of Capital Case1615 Words   |  7 PagesNIKE, INC.: COST OF CAPITAL On July 5, 2001, Kimi Ford, a portfolio manager at NorthPoint Group, a mutual-fund management firm, pored over analysts write-ups of Nike, Inc., the athletic-shoe manufacturer. Nikes share price had declined significantly from the beginning of the year. Ford was considering buying some shares for the fund she managed, the NorthPoint Large-Cap Fund, which invested mostly in Fortune 500 companies, with an emphasis on value investing. Its top holdings Read MoreCapital Structure1215 Words   |  5 PagesInformation My company choice is Nike Inc. (Nike), a multinational sports footwear, equipment and apparel manufacturing company based in Oregon, United States. This puts Nike in the apparel industry. In 2010, Forbes rated Nike as the top sports business with a total value of $10.7 billion. The most effective marketing strategy Nike employ is the sponsorship agreements they have with numerous top athletes in a variety of sports. Operating Risks of Nike When Nike was initially started out, the