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Issues
• Single cost or Multiple Cost?
• Cost of debt
• Cost of equity
• Weights of capital components
WACC (Weighted Joanna Cohen’s
Average Cost of Capital) Analysis
Total Equity (E) 3.494,50
Total Debt (D) 1.296,60
Total Capital (E + D) 4.791,10
Tax Rate (t) 38%
Weight of Equity 72,94%
Weight of Debt 27,06%
Cost of Debt (Kd) 4,30%
Cost of Equity (Ke) 10,50%
After tax cost of debt 2,70%
WACC 8,38%
Multiple or Single Cost
of Capital
Based on the understanding about single and multiple cost of capital, we
agree that the single cost of capital is the best way to value the cash flows
for the entire firm . The reason are as following :
• Nike has multiple segment that contributor to revenue like sport balls,
apparel, skates, bats, etc. we can see clearly that apparel, equipment
products gained over a half of footwear, but this is not enough evidence
to consider them as a cost of capital distinct from footwear.
Multiple or Single Cost
of Capital
• The first deficiency is the risk rate. Except the non-Nike branded
products such as Cole Hann have some differences, but they only
contributed a tiny part of Nike’s revenue. There are not significantly
different between the risk rate that every Nike’s segments stand
because all of these segments are related to sport business.
• The second deficiency is about business activities such as marketing,
distribution channel. With the management of Nike, all of these
segments are set in the same state. They have the same marketing
project, distribution channel, customer service, qualify guarantee, etc.
They are displayed in stores with the same design.
• For these deficiencies, it is company to claim that computing all of the
segments as only one cost of capital for whole company, is the true way.
Weight of Debt & Equity
Cost of capital based on market value not book value
Exhibit 4
• Geometric mean = 5.90%, arithmetic mean = 7.50%)
• Given from 1996 is Average beta = 0.98, beta in 2001 is 0.69.
• U.S Treasury 20-year Krf = 5,74%.
Revenue 9,488.80 10,153.02 10,812.96 11,515.80 12,264.33 13,000.19 13,780.20 14,607.02 15,483.44 16,412.44 17,397.19
Current Asset 3,625.30 3,858.15 4,108.93 4,376.01 4,660.45 4,940.07 5,236.48 5,550.67 5,883.71 6,236.73 6,610.93
Current Liabilities 926.00 1,167.60 1,243.49 1,324.32 1,410.40 1,495.02 1,584.72 1,679.81 1,780.60 1,887.43 2,000.68
NWC 2,699.30 2,690.55 2,865.43 3,051.69 3,250.05 3,445.05 3,651.75 3,870.86 4,103.11 4,349.30 4,610.26
Using this data, we found that North Point Large-Cap Fund should buy
Nike Inc..
Analysis – Technical Analysis
thanks!
Any questions?