Nike Case Solution

NIKE Case solution

Submitted By:

Section F Group 13

Devendra Rajput PGP30308

Shubhangi ABM11035

Poem Kabra PGP30329

Parul Rana PGP30308

Shruti Goyal PGP30345

1. Single or Multiple Costs of Capital:

Single because the businesses are related and have almost the same risk and cash flow is for entire firm and not form the single business.

1. Methodology for calculating the Cost of Capital: WACC:

WACC is right strategy for estimating the cost of capital. However, the data used should be current data and not the historical data. Also cost of debt need to be found using debt security offered by Nike which will current value.

Weight should be based on market value and not on book value.

Capital Sources:

Debt= $ 1296.6 mn

Equity Market Value = Stock Price* Total Outstanding Shares

=$ 42.09*271.5 

=$ 11427.44 mn

Wd= 1296.6/ (1296.6+11427.44) = 10.19%

We= 11427.44/ (1296.6+11427.44) = 89.81%

1. Cost of Debt:

Current price of Nike’s debt= $95.6

Total number of periods= 2*(2021-2001) = 40

Coupon Rate= 6.75/2=3.375

Future Value= -100

Using rate formula for excel =RATE (40,-3.375, 95.6,-100) = 3.5837%

Cost of Debt = 3.5837*2 = 7.167%

After Tax cost of debt= 7.167*(1-.38) = 4.44%

1. Cost of Equity:

DDM is not valid in this case as the company is not stable and CAPM is the right approach.

Risk free rate used is 20 year Treasury bond which is right estimate for risk free rate as it is the security available with the least risk. Hence the risk free rate is 5.74%.

Beta value used is historical average which is not the right approach. While considering beta value, most recent value need to be taken into account hence the latest beta value as per the last year is = 0.69.

The Beta is based on 1 year data. However it should be based on 3 years data.