Nike Cost of Capital

I. Single or Multiple Costs of Capital

I agree with Joanna Cohen’s decision to use only one cost of capital. The only difference in Nike’s business segments, the Cole Haan line, makes up such a small portion of revenues that it wouldn’t affect the calculations too much. All of Nike’s core businesses: shoes, apparel, equipment, are sold under the same strategy and distribution channels which essentially share the same risks. Since the risks will not differ from segment to segment, only one cost of capital is needed.

II. Methodology for Calculating the Cost of Capital

Since Nike has a mixture of debt and equity in its capital structure, the WACC method for calculating the cost of capital is accurate. However, I don’t agree with Joanna’s calculations for the weights of the debt and equity. Market value of equity and debt are a more relevant measure for the cost of capital, oppose to Joanna’s decision to use the historical book value of debt and equity, which will give a misleading present value for the company.

To determine the correct weight of debt and equity I have to first calculate the market value of equity:

Current Share Price x Current Shares Outstanding = Market Value

$42.09 x 271.5 million shares = $11,427.44 (in millions)

Using the new market value for equity, I can calculate the correct weights for debt and equity:

Weight of Debt:

$1,296.60 / ($1,296.60 + $11,427.44) = 10.19%

Weight of Equity:

$11,427.44 / ($1,296.60 + $11,427.44) = 89.81%

III. Cost of Debt

I