Sebastian Matouk Monday 15th November 2010
FIN-304: Case Study
Nike Inc. Cost of Capital
1) The weighted average cost of capital (WACC) is the rate (expressed as a percentage) that
a company is expected to pay to debt holders (cost of debt) and shareholders (cost of
equity). It is important in estimating a firm’s cost of capital because different securities
are expected to have different returns; WACC is calculated taking into account the
relative weights of each component of the capital structure – debt and equity, and is used
to see if the investment is worthwhile to undertake.
2) It is possible for a firm to have just one cost of capital. Most times however, a firm will
have multiple costs of capital for the numerous investments and projects they may have.
Different projects and investments typically have varying costs of capital, so only using
one can cause serous inaccuracies. For simplicities’ sake, I assumed that Nike uses one
cost of capital since its multiple business segments are not very different (shoes, apparel,
sports equipment etc.) and would experience similar risks and betas.
3) I do not agree with Joanna Cohen’s WACC calculation. She decided to use the book
value for both debt and equity. Even though the book value of debt is accepted as an
estimate of market value, book value of equity should not be used. To find the market
value of equity, multiply the stock price of Nike Inc. by the number of shares
outstanding:
