Cost of Capital Essay

1. WACC is utilize for discounting currency flows in the future, thus all the modules of cost must reflect securelys future abilities in raising capital. Cohen made the mistake of use the historical data in estimating the cost of debt yet the share expense has changed considerably over time. The market judge of equity should be used instead of book value. 2. Cohen calculates the cost of debt by taking total interest group expense for the year 2001 and dividing it by the companys average debt balance.This is an reckon of the true cost of debt, but is inaccu charge per unit and may not reflect Nikes current or future cost of debt. 3. Cohen obtained the corporate tax rate of 38% which is used to calculate the adjusted cost of debt by adding state taxes of 3% to the U. S. statutory tax rate 35%. In WACC calculation, marginal tax rate should be used as a corporate tax rate for the future estimate. We can use subject to Maturity (YTM) on 20-year Nike Inc. Bond issued in1996 of 6 . 75% live of Equity The 20-year of age(predicate) U. S.treasury used by Cohen for a short investment of NorthPoint for the short-term 3 months to 1 year yields is more suitable. Given the risk-free rate (Rf) of 5. 74%, the market risk premium (Rm-Rf) of 5. 90% and beta value of 0. 80, we can calculate the cost of equity employ the CAPM as follows Cost of equity = Rf + ? *(Rm-Rf) = 5. 75%+0. 80(5. 90%) = 10. 46% Weighted fair(a) Cost of Capital (WACC) We calculate the WACC of Nike Inc. using the weights and costs of debt and equity using the following formula WACC = Wd Kd(1-T) + We Ke.= 10. 05% x 7. 5 %( 1-38%) + 10. 46% x 89. 95% = 0. 4682% + 9. 4083% = 9. 8765% The weighted average cost of capital for Nike Inc. is approximately 10% percent. pass Given the birth price at WACC of approx. 10% ,stock price should be greater than $50. 92, which is higher than current stock price $42. 09. This shows that the current stock of Nike is undervalued and is discounted rate of 11. 17%. Cohens WACC of 8. 4% of the stock was undervalued compared to 10%. accordingly Kim Ford should invest in the Nike for her mutual fund.