Nike Wacc
What is the WACC and why is it important to estimate a firm’s cost of capital? Do you agree with Joanna Cohen’s WACC calculation? Why or why not?
1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firm’s stock.
1.2 Analysis of Johanna Cohen’s calculation We analyzed the process of Johanna Cohen’s calculation, and found some flaws we believe caused computational mistakes. i. When using the WACC method, the book value of bond is available as the market value since bonds are not quite active in the market, but the book value of equity isn’t. Instead of Johanna’s using equity’s book value, we should multiply the current price of Nike’s stock price by the numbers of shares outstanding. ii. When calculating the YTM of the firm’s bond, Johanna only used the interest expense of the year divided by the average debt balance, which fully ignored the discounted cash flow of the cost of debt.
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. Combining the analysis above, we now give our own WACC calculation as following:
2.1 The value of debt(based on EXIHIBIT 3). Since the book value of debt may represent the market value, we merely need to sum up the values of Long-term debt, Notes payable, and the Current portion of long-term debt: 435.9+855.3+5.4=$1,296.6 m
2.2 The cost of debt (based on EXIHIBIT 4): PV: -95.6 FV: 100 n: 40 Pmt: 6.75/2= 3.375 (as it pays semiannually) So, we get the YTM is i*2=3.58*2=7.16%
2.3 The value of equity (based on EXIHIBIT 1&4): Price of stock *
1.1 The definition of WACC Weighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firm’s stock.
1.2 Analysis of Johanna Cohen’s calculation We analyzed the process of Johanna Cohen’s calculation, and found some flaws we believe caused computational mistakes. i. When using the WACC method, the book value of bond is available as the market value since bonds are not quite active in the market, but the book value of equity isn’t. Instead of Johanna’s using equity’s book value, we should multiply the current price of Nike’s stock price by the numbers of shares outstanding. ii. When calculating the YTM of the firm’s bond, Johanna only used the interest expense of the year divided by the average debt balance, which fully ignored the discounted cash flow of the cost of debt.
2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. Combining the analysis above, we now give our own WACC calculation as following:
2.1 The value of debt(based on EXIHIBIT 3). Since the book value of debt may represent the market value, we merely need to sum up the values of Long-term debt, Notes payable, and the Current portion of long-term debt: 435.9+855.3+5.4=$1,296.6 m
2.2 The cost of debt (based on EXIHIBIT 4): PV: -95.6 FV: 100 n: 40 Pmt: 6.75/2= 3.375 (as it pays semiannually) So, we get the YTM is i*2=3.58*2=7.16%
2.3 The value of equity (based on EXIHIBIT 1&4): Price of stock *