NIKE’s Cost of

Capital
AYUSHI AGRAWAL(P40116)
Background
◦ Nike’s share price declined significantly. Its market share had fallen from 48%(1997) to
42%(2000)
◦ Nike management wanted to revitalize the company as the net income had fallen to $580
million from $800 million.
◦ Ford was looking to buy some shares of Nike, thus she wanted to understand the financial
health of the company. So she decided to develop her own Discounted Cash Flow to get a
clear picture.
◦ She understood that the share price is overvalued at K=12% but undervalued at k<11.7%
 Problem Statement
To estimate Nike’s cost of capital using proper models and
see whether Ford’s assistant Joanna Cohen has taken
legitimate assumptions to calculate the cost of capital and
whether what she is concluding is correct or not ?
◦ WACC = Kd(1-t)*Wd + Ke*We
◦ Single cost of capital
◦ To calculate the weights for the WACC model Joanna used the book value to
calculate equity whereas we have to use Market value.
Thus Market value= share price * No of shares
= 42.09*271.5 = 11427.44
Thus Total Equity (E) = 11427.44 and Debt (D) =1296.6
Thus We = 89.8% and Wd= 10.2%
Calculating Cost of Debt
(Kd)
◦ There are two types of Debt
◦ Long term Debt which is calculated by YTM current yield rate on publicly traded Nike debt
◦ = rate( 20,-6.75/2,95.6,-100,0)*2 = 7.37%
◦ Short term which is taken in account by Joanna but she has taken with denominator as total debt instead we
can take (interest expense/operating income) for 2001
= 58.7/1014.2 = 5.78%
◦ As total debt = 1296W (type 1) = (855.3 / 1296.9) * 100 = 66% , Cost of Debt (type 1) = 5.78%
W (type 2) = (441 / 1296.9) * 100 = 34% , Cost of debt (type 2) = 7.37%

Weight Average of Cost of Debt Kd = (66% * 5.78) + (34% * 7.37) = 6.33%

Calculating Cost of Equity
(Ke)
◦ Using CAPM Model
◦ 10 year current yield as risk free rate = 5.39%
◦ Market risk premium = 5.9%
◦ Ke = Krf + MRP* Beta
◦ Taking Beta= 0.69 Ke=9.61%
◦ Taking Beta =0.8 Ke =10.11%
Calculating WACC
◦ WACC = Kd(1-t)*Wd + Ke*We
◦ Taking Beta =0.8 Ke =10.11% and tax=38%
WACC = 8.62%*(1-0.38)*10.2% + 10.11%*89.8% = 9.48%
◦ Taking Beta =0.69 Ke =9.61%
WACC = 8.62%*(1-0.38)*10.2% + 9.61%*89.8% = 9.04%