Question and solution
Hi, I need an Introduction and conclusion for this case. Please refer some company background and data that base on the case for introduction (I put the link for this case on other attachment). I already got the answer for question 1-3. Need a summary of my solution for conclusion.
About 2 pages total.
Question :
Nike, Inc.: Cost of Capital
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?
2 If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions.
3 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?
Introduction :
Solution
Question 1 :
The WACC is the weighted average cost of capital for a firm. It is comprised of three components: cost of equity, cost of debt, and cost of preferred stock. The three are then added with the weights factored in to get the value of the WACC. The WACC is used by firms in their capital budgeting to discount cash flows. It can be seen as the opportunity cost for the firm to use their capital elsewhere. Generally a lower WACC is better, as it discounts cash flows to a lesser degree, leading to a higher chance of a positive NPV which will add value to the firm. In her calculation of the WACC Cohen used the book value of equity. I think it would be more suitable to use the market value of equity. In this case the market value of equity would be:
(273.3M Average Shares Outstanding) x ($42.09 Stock Price) = $11503.2M
The debt value will remain the same at $1,296.6M. The cost of debt and cost of equity will also stay the same at 2.7% and 10.5%, respectively. Using these numbers the WACC will now be:
0.027(.10) + 0.105(.90) = 9.72%
Question 2 : 2) As stated before, we did not fully agree with Cohen’s
About 2 pages total.
Question :
Nike, Inc.: Cost of Capital
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?
2 If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions.
3 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?
Introduction :
Solution
Question 1 :
The WACC is the weighted average cost of capital for a firm. It is comprised of three components: cost of equity, cost of debt, and cost of preferred stock. The three are then added with the weights factored in to get the value of the WACC. The WACC is used by firms in their capital budgeting to discount cash flows. It can be seen as the opportunity cost for the firm to use their capital elsewhere. Generally a lower WACC is better, as it discounts cash flows to a lesser degree, leading to a higher chance of a positive NPV which will add value to the firm. In her calculation of the WACC Cohen used the book value of equity. I think it would be more suitable to use the market value of equity. In this case the market value of equity would be:
(273.3M Average Shares Outstanding) x ($42.09 Stock Price) = $11503.2M
The debt value will remain the same at $1,296.6M. The cost of debt and cost of equity will also stay the same at 2.7% and 10.5%, respectively. Using these numbers the WACC will now be:
0.027(.10) + 0.105(.90) = 9.72%
Question 2 : 2) As stated before, we did not fully agree with Cohen’s