Nike Inc.

: Cost of Capital

Syndicate 6

Mitranti Anindya Ayu – 29121020

Joseph Gunawan – 29121035

Aditya Erawan –

Simon Erick - 29121289

1. What is WACC?
WACC or the Weighted Average Cost of Capital is a rate which firms can raise investment for
ongoing or future project. WACC is an average cost because it is a weighted average of the
firm’s component cost of capital, included the cost of debt to debt holders and cost of equity
to shareholders. WACC is calculated by consider the relative weight of each component of
the capital structure (debt and equity) and used to see if the investment is worth taking.

Why is it so important to estimate firm’s cost?

WACC can be used to estimate a firm’s cost of capital to decide capital budging decision.
Cost of capital is used to decide whether an investment proposal should be undertaken or
not. In the other hands, WACC can be observed constantly to see the market changes in
interest rate on load and dividend rates on stocks to make a better choice of the source
financing when the firm needs financing. And last, WACC can be used as a measure to
evaluate the performance of the firm based on comparing the returns that it is getting from
a selected project and the cost it is incurring in raising the finance for this project.

Do you agree with Joanna Cohen’s WACC calculation? Why?

Joanna Cohen’s calaculation is using 8.4% CAPM model and I do not agree with her WACC
because Joanna’s calculation is using the book value for debt and equity, which they are uses
as an estimate of market value and the book value of equity should not be used when
calculating cost of capital.