Total capital, fair value 0 = current fair value of nike's debt and equity (usd $ in millions) fcff 0 = last year nike's free cash flow to the firm (usd $ in millions) wacc = weighted average cost of nike's capital. Nike's capital structure has high equity capital relative to debt, with a debt-to-total-capital ratio of 014, though this figure rose slightly over the 12 months ended february 2016, following a. The cost of capital is a term in finance used in reference to the total of a firms fund the funds include both equity and debt capital in a nutshell, the cost of capital is as an evaluation yardstick for new projects by investors. Case 14 nike, inc: cost of capital recapitulation of the case's highlights kimi ford, a portfolio manager at northpoint group, a mutual fund management firm, is considering whether to invest in some of nike's shares and add to them to their large cap fund. The costs associated with both debt and equity capital are based on opportunity cost and can be calculated based on their expected returns the cost of equity is the return required to entice a hypothetical investor to invest in the common stock of a particular company.
Calculate the costs of equity using capm, the dividend discount model, and the earnings capitalization ratio what are the advantages and disadvantages of each method4 what should kimi ford recommend regarding an investment in nike. Debt is one component of a business firm's capital structure and is usually the cheapest form of financing for the company therefore, it's important for business owners to know how to calculate the cost of debt capital, which is the cost of the funds a business raises by taking out a loan. Cost of capital includes the cost of debt and the cost of equity +cost of debt includes cost of junk bonds, cost of ordinary bonds, cost of bank loan (liabilities) +cost of equity includes cost of ordinary shares.
The cost of capital takes into account both the cost of debt and the cost of equity stable, healthy companies have consistently low costs of capital and equity. In word format the equation states that wacc is the equity of the firm divided by the debt plus equity times the required return of equity plus the debt divided by the debt plus equity times one minus the marginal corporate tax rate on the project times the required return for debt. 2) for long - term debt, nike, inc had issued the bonds in which the cost of debt was calculated by finding the yield to maturity on 20-year nike inc debt with a 675% coupon semi-annually i assumed nike inc to have a single cost of capital since its multiple business segments (shoes, apparel, sports equipment, etc) are not very different. Company description nike, inc engages in the design, development, marketing, and sale of athletic footwear, apparel, accessories, equipment, and services. Aswath damodaran 4 cost of capital for the project: three caveats book values versus market values: while the book values of debt and equity are accessible on the balance sheet, the cost of capital is.
Cost of capital book value vs market value while calculating the nike's cost of capital using both the book value (exhibit 11) and the market value (exhibit 12), i could notice the mistake cohen made finding the equity value. The cost of debt, if it is intent to be forwarding looking, should be estimated by 1 yield to maturity of bond, or 2 according to credit rating is the internal rate of return (irr, overall interest rate) earned by an investor who buys the bond today at the market price, assuming the bond will be.
We use your linkedin profile and activity data to personalize ads and to show you more relevant ads you can change your ad preferences anytime. Updated annual balance sheet for nike inc cl b - inluding nke assets, cash, debt, liabilities & shareholder equity, investments, retained earnings and more. Cost of debt and cost of equity: cost of debt is the interest rate and the cost of equity is the expected rate of return demanded by investors in the firm's common stock the issue at hand is finding the correct costs of debt and equity in order to find an accurate calculation of wacc. The mix of debt and equity financing that you use will determine your cost of capital for your business two more traditional sources of capital for your business besides debt and equity financing, there are two other traditional sources of capital for your business.
If the debt to equity ratio gets too high, the cost of borrowing will skyrocket, as will the cost of equity, and the company's wacc wacc wacc is a firm's weighted average cost of capital and represents its blended cost of capital including equity and debt the wacc formula is = (e/v x re) + ((d/v x rd) x (1-t). A debt to equity ratio of 5 means that debt holders have a 5 times more claim on assets than equity holders a high debt to equity ratio usually means that a company has been aggressive in financing growth with debt and often results in volatile earnings. Whereas cost of capital is the rate the company must pay now to raise more funds, cost of debt is the cost the company is paying to carry all debt it has acquired cost of debt becomes a concern for stockholders, bondholders, and potential investors for high-leverage companies (ie, companies where debt financing is large relative to.