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Nike Case

Team 5 – Windsor Cohort

(Heidi Limmonen, Oksana Simakina, Masayuki Kondo,

Rui Dias, Andres Losada, Zsolt Makai)

1. 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?

WACC is the rate that a company is expected to pay to debtors and creditors. A weighted average of the component cost of debt, preferred stock, and common equity. (Birgham & Houston, 2009) This is the minimum rate that a company must earn on its assets in order to satisfy the company’s shareholders (most importantly, the creditors and the owners). WACC is calculated as a weighted average, or composite, of the various types of funds used over time, regardless of the specific financing used in a given year. (Birgham & Houston, 2009)
The WACC is a useful tool to measure how a company is financed and what the costs are of its capital. Furthermore WACC sets the minimum level that a company has to earn in order to satisfy creditors and owners (see above), therefore the model can be used as a benchmark figure (a minimum return rate) that a new project has to meet. The expected rate of return when evaluating such new projects has to be higher than the WACC (benchmark) in order to be profitable.
We don’t agree with the way Joanna Cohen calculated the WACC. Her assumptions made to calculate the cost of equity by the CAPM were not accurate. She only made general assumptions about the general economic environment, namely to calculate the risk-free rate of return and the market risk premium. We believe that the value of beta can’t be more precise, because of the limitations of the data provided.

2. If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and justify your assumptions.

As mentioned above, we do not agree with the way the WACC was calculated in

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