Professional Documents
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Cost of Capital
Nike, Inc.:
Case Background:
NorthPoint Large Cap Fund weighing whether to
buy Nike’s stock.
Nike has experienced sales growth decline, decli
nes in profits and market share.
Nike has reveal that it would increase exposure i
n mid-price footwear and apparel lines. It also co
mmits to cut down expenses.
The market responded mixed signals to Nike’s c
hanges. Kimi Ford has done a cash flow estimati
on, and ask her assistant, Joanna Cohen to esti
mate cost of capital.
What is WACC? and why is it important to
estimate a firm’s cost of capital?
The cost of capital is the rate of return
required by a capital provider in exchange
for foregoing an investment in another
project or business with similar risk. Thus, it
is also known as an opportunity cost.
Since WACC is the minimum return required
by capital providers, managers should
invest only in projects that generate returns
in excess of WACC.
What is WACC? and why is it important to
estimate a firm’s cost of capital?
The WACC is set by the investors (or
markets), not by managers. Therefore, we
cannot observe the true WACC, we can only
estimate it.
Do you agree with Joanna Cohen’s
WACC estimations? Why or why not?
Issues
Single cost or Multiple Cost?
Cost of debt
Cost of equity