, ° > COST OF DEBT [FY otf NIKE,Inc: ce, Aeataoaat SaaS! Cost Of Capital at eee [Eli sinate / mutipte cost 2 [Recommendation ie recommen to NOT BUY te share 2 wi buy Nike's shar, Buy when he Single Cost of Capital pricnthave 0 Mike. lower than nine tgs i a ‘ale of Nike roa| NIKE, Inc: Cost Of Capital — by Syndicate 9— Fina Hafnika 29114733 Roytama Januar S 29114796 Astrid Permata D 29114798 Parceka Wijaksani 29114802 Selvi Angelina 29114928. Whaf is WACC and why is it important to — estimate a firm’s cost of capital? The cost of capitals the rate of return required by a capital provider in exchange for foregoing an investment in another project or business with similar risk. WAC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. Since WACC is the minimum return required by capital providers, managers should invest only in projects that generate returns in excess of WACC. The WACC is set by the investors (or markets), not by managers. Therefore, we cannot observe the true WACC, we can only estimate it ‘The WACC equation is the cost of each capital component multiplied by its proportional weight and then summing: D F WACE = Rg(—t) «5+ Re oe Where: Rd = cost of debt Re = cost of equity {= corporate tax rate narket value ofthe firm's equity = book value ofthe firm's debtDo We Agree with Joanna Cohen estimations? Why or why not? Sle or mute eos cap cost date 2795 Cost of Eau, 10.5% Wace, 64% near Cn rnb ecient by Ws oeroned sos ane se mrt sven pn ee ‘he arate aceon ete Fee Ge coat apt Case Of Nike Inc.NothPoint Large Cap Fund weighing whether to buy Nike’s stock or not. Even Nike’s revenue had stabilized but Nike has experienced sales growth decline Nike management has reveal plan to revitalizing the company The analysts’ reactions were mixed Kimi Ford ask her assistant, Joanna Cohen, to estimate Nike’s cost of capital. Case Of Nike Inc.a Pea zis as UVA-F1353 Exhibit 1 NIKE, INC: COST OF CAPITAL, ‘Consolidated Income Statements ‘Year Endl May 31 1951996 199719981999 2000 att ‘ination ofan except pe tae ta) — S4708 $6476 Somes S951 SAT69 SAMI seams Coto ald ‘Gros pai T9568 2509—AeRE 3a.6 —S2AL ASH A ‘Seling nd admintrie ‘ a. Operating nce ‘Ea 98S IWR Na RSG oT Inet cxpose M2 MS 83 OSD SRT ter epee. et m7 7) m3) ms NSM Rearacaing charg et a 3 3. ae Income tore comes Gero Wot TRE ——6sK9 Tact 9192 Income ane 2 3a ee ee Te Netcom TTS TES Es SLA SS SST Ditscdsaningspetcommonshue $196 $ ISS 26K $ 139 8 157 § 207 8 2H6 Avcapeshas oustanding (ted) 2D BRS TD” KO TS AS Growth) Reve so 20 ao 28s ponsing income 22 4s om) 3030 Nem a 89 a8) ms Margin) Goce ee mi ssw Opting magi 130 90989107 Nomen Pea ye ce a re 9" ms ms ome somos The US. sary tat te Was 35%, The ste a at ey om -9% w 3.88, ‘Sse Cy ing he Sean Cm SPC. S WaarDo We Agree with Joanna Cohen estimations? Why or why not? Single or multiple cost of capital Cost of debt, 2.7% Cost of Equity, 10.5% WACC, 8.4% a4 Single / Multiple Cost ? Single Cost of Capital Nike has single Cost of Capital value in| holding company from several segmet projects. yard~~ COST OF DEBT |P}) _ The Cost of Debt, if itis intent to be forwarding looking, should be estimated by 1. yield to maturity of bond, or 2. Tt according to credit rating, sao om 20012023 The Yield To Maturity (YTM) erty sacs Stamm Comp 54% (mara 7.09% an ve ert corto det = 700512) = 439%The Yield To Maturity (YTM) is the internal rate of return (IRR, overall interest rate) eared by an investor who buys the bond today at the market price, assuming the bond will be held until maturity and that all coupon and principal payments will be made on schedule. Yield to maturity is the discount rate at which the sum of all future cash flows from the bond (coupons and principal) is equal to the price of the bond. The more appropriate cost of debt can be calculated by using data provided in Exhibit 4. We can calculate the current yield to maturity of the Nike's bond to represent Nike's current cost of debt.a UARISS ahi NIKE, INC: COST OF CAPITAL, Capital Market ad Financial Infomation on or around aly $, 2001 sar so uc tt Rot erm 3 9) Nowy esa twee ee eto hdy 2005 5 9 mote eae ae an ee we Eee I ke 259 oe at See ae Le eof nd oe 8 ae Pes iia iol 1 neha =)" Intrinstic Value < Current Share Price $33.91 < $42.09 eS ee]ba 6 | Recommendation 1. We recommend to NOT BUY the share. 2. If will buy Nike’s share, buy when the price/share of Nike, lower than intrinsic value of Nike“> GOST OF DEBT | 2 | IKE ne: oe Sra eae Cost Of noel (Di) Recommendation Single Cost of Capital ‘Case OF hee.