NIKE, INC.: COST OF CAPITAL
This case is intended to serve as an introduction to the calculation of the weighted average cost of capital (WACC) of the firm.
The case provides a WACC calculation and analysis which may have been conducted properly or may contain some gaps and/or errors. The task of the student is to critically review the analysis done by Joanna Cohen and provide their comments on it. If the student (or students in the group) do not agree with Joanna they must explain the reasons and provide their own analysis.
The case assumes that students have been exposed to the WACC, CAPM, the dividend discount model, and the earnings capitalization model.
1. What is the WACC and why is it important to estimate a firm’s cost of capital? What does it represent? Is the WACC set by investors or by managers?
2. Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
3. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions.
4. Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method? Which method is best for calculating the cost of equity? Which of these methods be most appropriate particularly for Nike and why?
5. What should Kimi Ford recommend regarding an investment in Nike?