# Nike : Cost Of Capital Essay

2297 words - 9 pages

Nike, Inc.: Cost of CapitalThe cost of capital can be thought of as the minimum return required by providers of finance for investing in an asset, whether that is a project, a business unit or an entire company. It needs to reflect the capital structure used to finance the investment (Cornelius, 2002). For companies which raise funds from multiply sources such as bank loans, share issues, venture capitals and so on, an appropriately estimate cost of capital is extremely important.On the one hand, the cost of capital is used as a discount rate to appraise new investments for a company, whether net present value (NPV) approach or internal rate of return (IRR) approach is applied. On the other hand, in an investment appraisal, for instance, a higher/lower cost of capital may cause an underestimate/overestimate of the present value (PV) of the future cash flow, thereby lead to a negative/positive NPV, which may cause a wrong investment decision in rejecting a project that should be accepted or accepting a project that should be rejected. Similarly in IRR approach, a rate of return larger than the cost of capital is usually required. Moreover, as cost of capital includes the cost of equity and debt, Cornelius (2002) suggested that, "the cost of capital formed a link between the investment decision and the finance decision". Finally, the cost of capital not only reflects the capital structure of a certain investment, but also represents the opportunity cost of an investment.To calculate the cost of capital for a company, the weighted average cost of capital (WACC) is widely used and accepted generally. Basically, several figures are needed in calculating WACC. Firstly, the weight of debt (KD) and the weight of equity (WE) are required. Secondly, the cost of debt (KD) and the cost of equity (KE) are required. Therefore, WACC = WD * KD +WE * KE. Detailed figures and methods used to calculate KD and KE will explain later.In Nike's case, when Joanna Cohen calculated the WACC of Nike, she made several mistakes and led to a wrong estimate of the cost of capital. The first mistake comes to the book value of equity used in calculating WD. Nike became a publicly traded company since December 2, 1980, the share price has changed significantly during 20-year's time. So, the market value of equity should be used instead of book value. Then, Cohen calculates the cost of debt by taking total interest expense for the year 2001 and dividing it by the company's average debt balance. This is an approximation for the true cost of the debt, but is too inaccurate and may not reflect Nike's current or future cost of debt. Thirdly, Cohen obtained the corporate tax rate 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. Practically, if a company has a lower average effective tax rate which are generated...

## Find Another Essay On Nike : Cost of Capital

### Cost of Capital at Ameritrade Essay

704 words - 3 pages brokerage industry and Charles Schwab, E*Trade, Waterhouse, and Quick and Reilly Group, in order to accurately measure Beta and likewise risk.Using the stock price and returns data in Exhibits 5 and 6 and the capital structure information in Exhibit 4 estimate the equity beta βs, asset beta βa and the cost of assets, ka, for (i) discount brokerage firms and (ii) investment services firms as comparable groups, assuming (i) debt beta=0

### Nike's Weighted Average Cost of Capital

1433 words - 6 pages . However, other companies that NorthPoint has invested in for its fund which include ExxonMobil, General Motors, 3M, and McDonalds, have by far outperformed Nike in the financial markets in 2001 and are keeping the fund afloat while the rest of the economy continues to slide.Cost of Capital When determining the true value of a stock, one of the most important figures we must analyze is the firm?s weighted average cost of capital, or WACC. The WACC

### The Cost of Equity Capital and the Capital Asset Pricing Model

1785 words - 7 pages When discussing the cost of equity capital, or the rate of return required by investors for their share expenses, there are three main models widely used for analyzation. These models are the dividend growth model, which operates on the variable of growth and future trends, the capital asset pricing model (CAPM), which operates on the premise that higher returns are a result of higher risk, and the arbitrage pricing theory (APT), which has a

### The Cost of Capital is a critical element in business decisions

4025 words - 16 pages The Cost of Capital is a CriticalElement in Business DecisionsA Report submitted in partial fulfilment of the requirements for the award of Master of Science of the Loughborough University.November 2004ABSTRACTThis paper discusses the issue of whether the Cost of Capital is a critical element in business decisions through the topics of Capital Structure and the effects of the Cost of Capital on a company's competitiveness.Through the use of both

### The Cost of Capital is a Critical Element in Business Decisions

3689 words - 15 pages PAGE \* MERGEFORMAT 15 The Cost of Capital is a Critical Element in Business DecisionsMark FrystakAmerican Public University SystemFINC 600 Corporate FinanceMany of the critical decisions that business owners and senior management face can be categorized as investment opportunities. Whether building a new facility, taking over another business or expanding their investment portfolio, managers and owners are frequently making investment

### NIKE

1182 words - 5 pages Barber 1 Table of Contents Introduction………………………………………………………...page 2 History……………………………………………………………...page 2 Total Revenues……………………………………………………..page 3 Gross Margin……………………………………………………….page 3 Net Income…………………………………………………………page 4 Current Assets……………………………………………………...page 4 Current Liabilities………………………………………………….page 4 Working Capital…………………………………………………....pages 4 – 5 Nike’s Health………………………………………………………page 5 Common Stock

### Why is Nike the Biggest Training Shoe Company in the World?

1109 words - 4 pages in the sports wear industry. Nike in 1962, started as Blue Ribbon Sports, as its Founder member, Phil Knight thought there was a market for athletic shoes designed by athletes for athletes. In the year 1964, Bill Bowerman, Knight's track coach & Phil Knight joined hands together & NIKE Inc. was co-founded with headquarters in Beaverton, Oregon. Nike's grassroots strategy was born of low capital and necessity, but became one of the

### Commodity Chain Analysis of Nike Shoes

1609 words - 6 pages , subcontracting the production component of its supply chain to various low-cost regions has enabled Nike to maintain high profits. Through subcontracting its production process instead of direct capital investment in a particular place that has offered Nike the flexibility of relocating its production easily to places that had the least cost of production. In the 1960s, Nike used to subcontract the production process to factories in Korea and Taiwan

### Nike's Marketing Plan

2034 words - 8 pages NIKE is the world's #1 shoemaker in the world. Basketball players still want to be like Mike, but shoe companies want to be like NIKE. NIKE currently dominates the U.S. footwear market with about 45% of the total market. NIKE controls more than 20% of the US athletic shoe market. The company designs and sells shoes for a variety of sports, including baseball, basketball, cheerleading, golf, volleyball, hiking, tennis, and football. NIKE also

### Nike Custom Kiosk Marketing Plan

1229 words - 5 pages customers Weaknesses • Cost of building a kiosk • Cost of implementing kiosk in university bookstores and stadiums • Dividing sales with universities Opportunities • Students are looking to purchase products they can customize • The opportunity of shipping product to students while they are on campus • Allowing students to purchase product using their student ID • Many universities are already sponsored by Nike, allowing the kiosk to be

### Strategic Analysis of the Firm, Nike INC

5893 words - 24 pages modest goal then was to distribute low-cost, high-quality Japanese athletic shoes to American consumers in an attempt to break Germany's domination of the domestic industry. Today in 2006, Nike Inc. not only manufactures and distributes athletic shoes at every marketable price point to a global market, but over 40% of our sales come from athletic apparel, sports equipment, and subsidiary ventures. Nike maintains traditional and non-traditional

## Similar Essays

### Cost Of Capital Essay

512 words - 2 pages The cost of capital and bond rating are very important in the capital budgeting process. Capital budgeting is the planning process used to determine a firm's long term investments such as new machinery, replacement machinery, new plants, new products, and research and development projects. (wikipedia.org) Most companies finance their capital projects by either issuing stock, issuing debt, and reinvesting prior earnings. There are

### Cost Of Capital Punishment Essay

606 words - 2 pages Running Head: COST OF CAPITAL PUNISHMENTCost of Capital punishment[Writer Name][Institute Name]Cost of Capital punishmentContrary to popular belief, a capital punishment does not cost more than life in prison. The reason why modern executions cost so much is because of all the legal proceedings. However, what if we used the most effective execution machine through history? The guillotine, Therefore the cost of the capital punishment would go

### Cost Of Capital Punishment Essay

1029 words - 4 pages process so the state is not spending millions of dollars on sentencing and trials that could be used for useful repairs the state needs or expenses the state has.References(1990, February). A matter of engineering. The Atlantic. Retrieved from http://www.theatlantic.com/doc/199002/electric-chair/2Costanzo, M., & White, L. (1994). An overview of the death penalty and capital trials: History, current status, legal procedures, and cost [Online

### Marriot Corporation Cost Of Capital Essay

929 words - 4 pages 1.Marriott uses its' cost of capital estimates to create a hurdle rate to effectively run operations. Marriott uses these estimates to operate its four financial strategies. These are managing rather then owning hotel assets, investing in projects that increase shareholder value, optimizing the use of debt in the capital structure and repurchasing undervalued shares. If the company uses its overall WACC it may have divisions accept projects with