Nike Wacc: September 2013

Find the Values of the Components in the Capital Structure

E = 890.35M shares $65.40 = $58,228.89 million

P = N/A

L= 1447.358M

B = 826.041M

V = 58,228.89M + 826.041M + 0 + 1447.358M= $60,502.289M

Find the Weights of the Components in the Capital Structure

E/V = 58,228.89/60,502.289= 0.962

B/V = 826.041/60,502.289 = 0.0137

L/V = 1447.358/60,502.289 = 0.0239

Find the Component Marginal Costs of Capital

kd = 0.0769 {see table}

ke = rf + β(km - rf) = 0.0389 + .61(0.57) = 0.07367{CAPM}

kL = kd(1-t) + ρL = .0769 (1-.35) + .02 = .069985

Plug into the Equation and Hack the WACC

ka = ke(E/V) + kd(1 – t)(B/V) + kp(P/V) + kL(L/V)

ka = 0.07367(0.962) + 0.0769(1 - 0.35)(0.0137) + 0.069985(0.0239)

ka = 0.0732 0.07

The Cost of Capital Project: Nike

Objective

The assignment at hand is to estimate the weighted average cost of capital (WACC) for Nike at the current time.

The Primary Equations

The theory of why managers should use WACC in net present value analysis comes later in the course. For now, start with the equations for WACC, per se:

ka = ke(E/V) + kd(1 – t)(B/V) + kp(P/V) + kL(L/V) [1]

V = E + B + P + L

The symbol, ka, is the same as WACC. V is the total market value of the corporation.

Table 1: | Nike: September 9, 2013: Long-Term Debt | May 31, 2013, $1,267,000,000 (including current portion of $57,000,000) comprised of: | -- 01 -- $50,000,000 corporate bond payables, bearing interest at a rate of 4.70%, due Oct. 1, 2013. | -- 02 -- $111,000,000 corporate bond payables, bearing interest at a rate of 5.15%, due Oct. 15, 2015. | -- 03 -- $499,000,000 corporate bond payables, bearing interest at a rate of 2.25%, due May