Nike,CostofCapital资本成本分析案例

1、1. What is the WACC and why is it important to estimate a firms cost of capital Do you agree with Joanna Cohens WACC calculation Why or why notThe definition of WACCWeighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital

2、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 firms stock.Analysis o

3、f Johanna Cohens calculationWe an a lyzed the process of Joha nna Cohe r/s calculatio r 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 va

4、lue of equity isnt. Instead of Johannas using equitys book value, we should multiply the current price of Nikes stock price by the numbers of shares outsta nding.ii. When calculating the YTM of the firms bond, Johanna only used the interest expense of the year divided by the average debt balanee, wh

5、ich fully ignored the discounted cash flow of the cost of debt2. If you do not agree with Cohens 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:The value of debt(based on EXHIBIT 3

6、).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:+=$1, m9The cost of debt (based on EXHIBIT 4):PV:FV: 100n: 40Pmt: 2= (as it pays semiannually)So, we get the YTM is i*2=*2=%T

7、he value of equity (based on EXIHIBIT 1&4):Price of stock * numbers of shares outstanding= *=$11,The cost of equity (based on EXIHIBIT 4):E(Ri) = Rt+ E(Rm)-Rfl * PiBecause the go ver nment bond yield is %, Geometrical historical risk premium is %, and the average historical P of Nike is , then we ge

8、t:E(Ri)= %+%* =%Weights of each security (based on &Weight of debt=l/(l/+H/=%Weight of equity=(l/+ll,=%Cost of capital by WACC method (based above):/Cost of capital = Weight of debt * Cost of debt * (1 - Tax rate) + Weight of equity * Cost of equity = % * %*+%*% = %3. Calculate the costs of equity u

9、sing CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each methodCalculating the costs of equity by CAPM, and its advantages & disadvantagesi. Calculation:According to , we have already got the result of CAPM, which is %ii. Advant

10、agesFirst, because CAPM is a theory based on the whole market, it obviously includes the effects between the market as the integrity and each in dividual stock Second, with the counterbalanee among each stock in the entire market, CAPM only needs the con sideratio n of systematic risk, which much si

11、mplifies the calculation. Third, CAPM also bypasses the spec讦ic values of future cash flow because the equation is actually the relation between systematic risk and return rate, which is also another simpl讦ication of calculating Fourth, merely depending on the systematic risk, CAPM could offer the i

12、nvestors a reliable discounting rate to assess the value of a certain investment.iii. Disadvantages:First, involving the counterbalance among the entire market, CAPM acquiesces an effective, active and healthy market environment. Second, comparing the consideration of market risk, CAPM may omit the

13、subtle risk differences among each single firm Third, the crucial systematic risk, the beta coefficient, is obviously hard to calculateCalculating the costs of equity by DDM, and its advantages & disadvantagesi. Calculation (based on EXHIBIT 4):Based on the divide nd discou nt model, Po = Do * (1+g)

14、 / (k 一 g), then we get the return rate (the cost of equity) k = Do * (1+g) / Po + g =* (1 +/+=%ii. AdvantagesFirst, DDM fully considers the time value of consistent cash flow of an investment. Second, it is pretty easy to get the necessary historical data Third DDM is flexible enough for the adjust

15、ment of any future situation. Fourth, once the growth pattern is confirmed, it is very straightforward to get the discount rate of assessing an investment.iii. DisadvantagesFirst, without eno ugh con siderati on of risk cost, DDM may un derestimate the equity cost Second, all of the data is based on

16、 historical record, so the result is not reliable con sidering of the future situations Third, with the predetermined growth rate, it is obviously practical for the stock investors to estimate the possible profit, but may mislead the stock issuing firm from a better budgeting decision to a comparati

17、vely unsubstantial investmentCalculating the costs of equity by the earnings capitalization ratio, and its advantages & disadvantagesi. Calculation (based on EXHIBIT 1&4)According to the earnings capitalization model, we have cost of equity = E j Po =/ = %ii. AdvantagesFirst, its very easy to calcul

18、ate and understand. Second, its easy to get the necessary accounting dataiii. DisadvantagesWithout any consideration of the risk and the growth of the firm, it doesnt reflect the true value of an investment or the cost of the budgeting at all.4. What should Kimi Ford recommend regarding an investment in NikeAccordin