The objective for this week's case is the calculation of Weighted Average Cost of Capital (WACC) for Nike and it's use in estimating the value of the company using the Discounted Cash Flow (DCF) methodology.
We know from annual surveys that all large corporations calculate their WACC on a regular basis and use it for Capital Budgeting and other purposes. WACC is also used as an appropriate discount rate when calculating the value of a company using the DCF method.
The PPT files 'BE Chapter 9' and 'BE Chapter 10' should refresh your knowledge of WACC. You should also reread your notes from the 'Managerial Finance' class for this topic.
Case 13 should be read carefully and used as a study guide. It gives you a comprehensive overview of the methods and models used by financial analysts and corporations to estimate WACC.
Case 15: Nike, Inc.
In your case report you should address these issues (i.e. answer these questions).
- What is the WACC and why is it important to estimate a firm's cost of capital? Do you agree with Joanna Cohen's WACC calculation? Why or why not?
- If you do not agree with Cohen's analysis, calculate your own WACC for Nike and be prepared to justify your assumptions. Calculate the cost of equity using CAPM.
- What should Kimi Ford recommend regarding an investment in Nike?
Once successfully estimated Nike's WACC, use the box at the bottom of Exhibit 2 to figure out Equity value per share. Then, make your investment recommendation, based on the appropriate arguments and data.
This is designed to be a fairly straightforward WACC case, combined with DCF valuation. Make sure you understand how the DCF method is used in Exhibit 2. You will have to use the same methodology is some of the later cases.