Professional Documents
Culture Documents
Haoyuan Li
1. I disagree with Joanna Cohens WACC Calculations in some parts.
First, what I agree with her is that a single cost of capital should be
used. As WACC is the average of the costs of companys different
types of financing, it is used for Kimi ford to evaluate Nikes share
price. In addition, according to Joanna Cohens finding, Nikes
business segments are very similar except Cole Haan which only
makes up a tiny part of revenues-, therefore computing one cost of
capital is a proper way.
However, it is quite confusing that she estimated cost of debt by
taking interest expense for yr2001 and dividing it by the average of
debt balance of yr2000 and yr2001. Since WACC shows the return
that both kinds of stakeholders (lenders and equity owners) expect
to receive in the future, the cost of debt should be estimated to
demonstrate the future interest rate that the company should pay
for.
Additionally, according to MACC formula, it is more realistic to use
market value instead of book value to calculate total capital.
2. WACC=E/V* Re + D/V* Rd(1-Tc)
=9.811%*11427.44/ 12738.83+4.44%* 1311.39/ 12738.83
=9.26%
(Please find the breakdowns in spreadsheet Q2)
3. ((Please find the calculations in spreadsheet Q3)
CAPM:
Disadvantage:
The CAPM has set many assumptions which are not quite realistic.
First it is hard to predict beta since the market is flowing all the
time. When predicting beta, the overall market for the
company/industry can be varied. Therefore, the beta may not reflect
very accurate risk for the asset.
Also, about risk-free rate, we usually use the yield on short term
government securities. However, the yield changes every day and it
may affect the reliability of the outcome. Thirdly, the return on
market is a historic data and the model is for predicting future
market returns- which is not quite representative.
Additionally, the model assumes that all shareholders have access
to the same information and agree about the risk and expected
return of all assets which is not in quite accordance with reality.
4. With the assumption that the terminal growth rate is 3% and the
cost of capital calculated above 9.26%, we worked out the Equity
value per share of Nike is $57.12, which revealed Nike was
undervalued at its current share price of $42.09. I would
recommend Cohen to buy Nike Inc..
Not only because the Nikes share price is undervalued, but also
Nike announced that they are planning to make business segments
adjustments to develop athletic-shoe products and its apparel line.
This means Nike probably will generate more revenues by digging
deep into some markets which have been overlooked. Therefore, I
would recommend Kimi Ford and also NorthPoint Group to buy
shares from Nike.