Nike Inc. Case Study

Nike Inc. Case

What is WACC? Why is it important?

Weighted Average Cost of Capital (WACC) is a rate that a company is expected to pay on average to all its shareholders to finance its assets. It is used as a hurdle rate for investors to evaluate whether or not to invest.

WACC plays an essential role when it comes to making capital budgeting / corporate strategy decisions. WACC helps the firm’s decision maker to evaluate the risk and return of projects, also, WACC helps the investors to determine the acceptability of each investment project.

Do you agree with Joanna Cohen’s calculation?

Single / Multiple Cost of Capital

I agree with Joanna’s assumption on the use of single cost. The reason to which is Nike’s business segments, according to the case, basically are the same. The only different segment would be the Cole Haan dress product line. However, this product line only makes up a small fraction of total revenues, I think it is acceptable to neglect and use a single cost to evaluate the firm’s cost of capital

Cost of Debt

In Joanna’s assumption, the cost of debt was computed based on historical data. Cost of debt should use the same cash flows as cost of equity and therefore, we could calculate Nike’s cost of debt by acquiring the yield to maturity of bonds issued by Nike:

Cost of Equity

CAPM

Advantage:

Simple and applicable in practice. CAPM also takes into account systematic risk, which is left behind by the dividend discount model (DDM).

Disadvantage:

Unrealistic assumptions— CAPM is based on a number of assumptions. Businesses that use CAPM to assess an investment need to find a beta reflective to the project or investment; often a proxy. However, accurately determining one to properly assess the project is difficult and can affect the reliability of the outcome.

Dividend Discount Model

Advantage:

It values a company's stock without taking into account market conditions, so it is easier to make comparisons across companies of different sizes and in different industries.

Disadvantage:

DDM assumes a firm pays constant dividend, which most of the firms don’t. Also, this model does not take into account non dividend factors that would