ASSIGNMENT SUBMITTED BY: SUBHAM CHKRABORTY

CLASS: PGDM SAP

ERP: 0191PGM002

After reviewing all of the information available to us regarding the firm and the
subsequent calculations presented by Ms. Cohen, we found that we did not
agree with the methods she used to reach the WACCresults due to the fact that
she made several assumptions that wo believe to be incorrect, which are:

1. Incorrect Debt-We lound thal the debt of the fim was calculated improperly
when Ms. Cuhen added short-term debt and notes payable lo the long term
debt.. When calculating the WACC the correct method, in the case of Nike, Inc.,
is to take into account only Long-term debt.

2. Incorrect Tax Rate - We found that Ms. Cohen use a lax rate of 38% which is
incoreet since we believe that she should have used a tax rate of 36% which is
the most recent tax rate paid by Nike in 2001 and is therefore more likely to be
the most accurate rate.

3. Incorrect Beta – We found that the beta used by Ms. Cahen is also incorrect.
Ms. Cahen used the average of Niks's historical betas which comes to 0.8
instead of the using the most current year-to-date bets of 0.69 that was just
calculated recently.

4. Incorrect Risk Free Rate - We found that Ms.Cohen's decision to use the 20
year hunl bound rate of 5.74% as the Risk free rate was incorrect and she
should have used the short term rate (12 months or less)instead, which in this
case is 3.59%.
5. Incorrect Equity - We found that Ms.Cohen calculated the equity figure by
including all of the shareholders' equity to arrive at a figure of 3,194,500,000
which was incorrect because when calculating the equity she should have used
the current market value should be included which is calculated by multiplying
the current stock price by the current number of shares outstanding.

My own WACC for Nike

Formula used in calculations:-

WACC=Rd(1-T)*(D/V)+ Re(E/V)

Re = total cost of equity

Rd = total cost of debt

E = market value total equity

D = market value of total debt

V = total market value of the company’s combined debt and equity or E + D

E/V = equity portion of total financing

D/V = debt portion of total financing

Tc = income tax rate

Case. Study data factors:

Tax Rate=36%

Market Risk Rate=7.50%

Risk Free Rate =3.59%

Beta, = 0.69

Debt D=435.9
Equity E=42.09*271500000=11427.4

Value V= 435.9+ 11427.4 = 11863.3

Solving for Rd and Re and Tax Rate

Tax Rate = 36%

Cost of Debts

N=40

PMT=(6.75/2)=3.375

PV= -95.60

FV=100

I/Y=3.5837*2= 7.1674%

Rd=2*I/Y= 7.1674%

Cost of equity (via CAPM method)

rf= 3.59%

Beta= 0.69%

rm= 7.50%

Re = rf+ beta(rm-rf) => 3.59% +(0.69)(7.5%-3.59%) ==> 6.288%

Re=6.288%
WACC Calculation:

WACC = Rd(1-T)*(D/V)+Re*(E/V)

=> 7.1674%(1-36%) * (435.9/11863.3) + 6.288% * (11427.4/11863.3)

=>0.001683+.6057

=>.062253

WACC= 0.62253 = 0.63%

WACC - 6.23%

Justification of Assumptions:

a. We believe that short-term debts (listed under current liabilities) should only
be

used when caleulating the WACC for small firms in the U.S. and other

international firms that rely upon it on a continuous basis for operations.

b. We believe that using the most recent tax rate that the firm has paid more

accurately reflects the current tax environment and thus is more likely to
represent
the actual tax rates the firm will encounter.

c. We believe that rather than using the average historical beta it is more
prudent to

use the current year-to-date beta of the firm will more likely represent the
current

credit risk that the firm is currently operating under and therefore it will
increase

the accuracy of the estimated cost of equity and the subsequent WACC.

d. We believe that using the current yield on 20-ycar Treasuries for the risk frce
rate

is incorrect due to the fact that the CAPM is a short-term model that calls for a

short-lerm interest rate such as the current yield on short-term Treasuries (12

months or less).

3. Calculate the costs of equity using CAPM, the dividend discount model, and
the earnings

capitalization ratio.

I.Cost of Equity using Capital Asset Pricing Model:

CAPM Calculation: R. = ri +ß (rm T:)

3.59% +.69(7.50% - 3.59%)

3.59% + 2.70%

Re = 6.288%

II.Cost of Equity using Dividend Discount Model:

Given the following: Po = S42.09, Divi = .48, g = 5.50%

DDM Calculation: r= Div,/P, +g

= .48/42.09 + .055 .0114 + .055 = .0664

Re = 6.64%

III.Cost of Equity using Earnings Capitalization Ratio:

Given an estimated EPS of S2.32 and a current stock price of $42.09 gives us the

following estimated cost of equity:

$2.32 / $42.09 = 0.0552

Re = 5.52%

4. What should Kimi Ford recommend regarding an investment in Nike?

Based upon the information available to us we reached the following

conclusions:

1) Since non-Nike brands accounted for only 4.5% of Nike's total revenue and
the only
non-sports related business segment was their Cole Haan line it was very likely
that

all of the various business segments faced the same risk factors. Therefore
rather than

compute multiple costs of capital we thought that it would be appropriate to

use to a

single cost of capital for the entire company.

2) Since Nike utilizes two capital components, debt and equity, we calculated
their cost

of capital using the after-tax WACC method (based upon financial figures
available)

which gave us the following results:

a.

Capital Structure

Debt: 3.67%

Equity: 96.33%

b.

Market Value (in million)

i Debt:. 435.9

ii. Equity: 11.427.4

c. Component Costs of Capital

Debt 7.17%

Equity 6.29%

3) Taking these component costs into account, along with all of the additional
relevant

numbers available to us we calculated Nike's after-tax WACC to be 6.23%.

We would strongly recommend, that based upon the analysis by Ms. Ford in
which she

concluded that Nike is undervalued at discount rates below 11.17%, Ms. Ford
immediately

invest a substantial amount of the NorthPoint Large-Cap Fund in Nike, Inc. since
it is a

definite value investment with its discount rate of 6.23%.