Nike, Inc.: Cost of Capital

1. Miss Nabduan D. 55202120022. Miss Pratthana J. 55202120033. Mr. Phornpat R 5520212004

4. Miss Neeranuch Ng 55202120065. Miss Reveepitchaya R. 5520212007 6. Miss Chulaluck Ch. 5520212008

Mistakes From The Case Study

• 1. Methodology for Calculate the cost of Capital (WACC)• Should use market value not book value

• 2. Cost of debt• Add redeemable preferred stock (0.3)

• 3. Cost of equity • CAPM – Change beta from average to latest beta. 0.8 and 0.69

respectively.

Market Value should considered

Market Value of Equity = Stock Price x No. of Share Outstanding

From the Case

• Book Value of Equity = Stock Price x No. of Share Outstanding

Market Value of = 37.27 x 271.5

Market Value of = 10,118.81

Recalculate Market Value

• Market Value of Equity = 42.09 x 271.5

Market Value of Equity = 11,427.44

Exhibit 2

Find WACC

Total Amount of Debt = Current LT + Notes Payable + LT Debt (discounted) + Redeemable Preferred stock

• Total Amount of Debt = 5.40 + 855.30 + 435.9 + 0.3 = 1,296.90

• Debt + Equity = 1,296.90 + 11,427.44 = 12,724.34

• Weight of Debt = Debt / Debt + Equity

Weight of Debt = 1,296.90 / 12,724.34 = 0.102or 10%

• Weight of Equity = Equity / Debt + Equity

• Weight of Debt = 11,427.44 / 12,724.34 = 0.90 or 90%

Exhibit 3

Find Cost of Debt

Liabilities within 12 months

• Interest rate = Interest Payment / Operating Income

• Interest rate = 58.7 / 1014.2 = 0.058 or 5.8%

•

Long-Term Liabilities (Yield to Maturity)

• Nike’s bond issued on 1996, and will expire on 2021, thereby 20 years

• N = 40 , FV = -100 , PV = 95.60 , PMT = -3.375

• Compute I/Y = 3.58 %

• Annual I/Y = 3.58 x 2 = 7.16%

• After Tax Cost of Debt = I/Y (1 - Average Effective Tax) = 7.16% (1-0.38%)=4.44%

Exhibit 1,4

This interest rate is approximately equal to 20 year yields on U.S Treasuries (Exhibit 4)

N = 40( 20 years x 2 )PMT = -3.375( 6.75/2 )

Find Cost of Equity

Find Cost of Equity

From Bond with 20 years maturity, compound semi-annually with 6.75% coupon rate.

• Ri = rf + ( rm – rf ) B = 5.74 + (5.90)(0.69) = 9.81%

Exhibit 1,4

This interest rate is approximately equal to 20 year yields on U.S Treasuries (Exhibit 4)

Rf = 5.74 From 20 years current yield on U.S TreasuriesRpm = 5.90From Geometric MeanB = 0.80From Average history Bata

Rpm : Risk Premium

Find WACC

WACC = [Kd(1-t) x D/(D+E)] + [Ke x E/(D+E)]

WACC = [Cost of debt x Weight of Debt] + [Cost of equity x Weight of Equity]

WACC = 4.44% x 10% + 9.81% x 90%

= 9.27%

Exhibit 2

• To use market weights to estimate WACC will cause show how much the firm to raise capital today. Cost should approximated by market value of capital, not by the book value of capital.

Teletech Corp, 2005

Teletech Corporation(By single rate)

Cost of Equity(Kequity,teletech)

= Rf + β*RPM

= Rf +β*(Rm - Rf)

= 4.62% + (1.15*(10.12%-4.62%))

= 4.62% + (1.15*5.5%)

= 10.95%

Rf : U.S.Treasury Securities 30-yearβ : Beta of Teletech CorporationRm : Risk Market RateWeightdebt,teletech : Weight of debt in TeletechKdebt,tele : After-tax cost of debt Weightequity,tele

: 100 %- Weight of debt in Teletech

= 100%-22.2% = 77.8%Kequity,tele : Cost of equity

WACC Teletech Corporation= [(Weightdebt,teletech* Kdebt,teletech)] + [(Weightequity,teletech* Kequity,teletech)] = [(22.2%*3.53%)] + [(77.8%*10.95%)]= 0.007837 + 0.085191 = 0.0930*100 = 9.30%

Telecommunications service Industry

• Cost of Equity(Kequity,telecom)

= Rf + β*RPM

= Rf +β*(Rm - Rf)

= 4.62% + (1.04 *(10.12%-4.62%))

= 4.62% + (1.04*5.5%)

= 10.34%

Rf : U.S.Treasury Securities 30-yearβ : Average beta of Telecommunications Service IndustryRm : Risk Market RateWeightdebt,telecom : Market value Debt/CapitalKdebt,tele : After-tax cost of debt Weightequity,telecom : 100 %- market value Debt/Capital = 100%-27.1% =72.9%Kequity,tele : Cost of equity

WACC Telecommunications service Industry= (Weightdebt,telecom* Kdebt,telecom) + (Weightequity,telecom* Kequity,telecom)

= (27.1%*3.44%)+(72.9%*10.34%)= 0.009322 + 0.0753786 = 0.084701 = 8.47%

Product & System

FIND WACC :Cost of Equity PS = Rf +MRP*β

= Rf +(Rm-Rf)*β= 4.62% + 5.5%*1.36 = 12.1%

Cost of Debt PS (After-tax cost of debt) = 4.48%Average of Weight of Equity = 100% - Market Value Debt/Capital = 100 – 9.20 = 90.80 %Average of Weight of debt = (13.1%+ 5.3%)/ 2 = 9.20%WACC PS = {Weight Debt,(p+s)*K debt,(p+s)} + {Weight Equity,(p+s)*K Equity,(p+s)}= 9.20% * 4.48% + 90.80% * 12.10%= 11.4%

Rf: Risk-free rate = 4.62% (the yield on 30-years U.S Treasuries) Rm: Market risk rate =10.12% MRP: Market-risk premium = Rm-Rf= 10.12% - 4.62= 5.50%Average of Beta = (1.39+ 1.33)/ 2 = 1.36

Teletech Corporation,2005(By Multiple-rate)

WACC of Teletech Corporation WACC Telecom = 8.47 %WACC P&S= 11.4 %WACC Teletech = WACC Telecom + WACC P&S

= (8.47 % * 75 %) + (11.4 % * 25 %)= 9.20 %

Conclusion

WACC 8.47% < 9.2% < 11.4%Telecom < Teletech Corporate < P&S

• From the result, products and systems segment has the highest WACC • A high WACC indicates that a company is spending a comparatively large amount of

money in order to raise capital, which means that the company may be risky.• The multiple-rate method would give lower cost (9.20% )than the single-rate method

(9.30% ) which give higher return to shareholders better than a single rate method.