Nike Case 1
The WACC is the minimum return a company need to earn to satisfy all of
its Investors, including stockholders, bondholders, and preferred
stockholders. So, as the name suggests, WACC is the typical interest rate
a business pays to finance its assets.
One of the most crucial financial metrics is WACC because practically
every organization needs to acquire cash to expand. The higher it is, the
less money a company will make after expenses, as it represents the cost
of acquiring capital.
In this case we will compare my results with Joanna Cohen results.
My calculation of Nike’s Debt is the following :
Nike’s Equity is :
Then is can use the numbers above to determine the Weight of Nike’s
Debt and Equity.
For me those 2 numbers are most accurate than Joanna’s numbers.
The YTM is :
I believe Joanna made few errors. First, she computed the debt and equity
weights using book value rather than market value. The book value of an
item is the price paid for it that will never change as long as you possess
it. As a result, she made a mistake by calculating the cost of debt using
historical data when she should have used market value based on current
data. This choice is made to demonstrate how much it will cost the
business to obtain cash today. Furthermore, Cohen's cost of debt
estimate, which was based on dividing the company's average debt level
by the total interest paid in 2001, is incorrect since it fails to account for
Nike's present or future cost of debt. Instead, she ought to have used a
20-year debt base with a semi-annual coupon rate to determine the yield
to maturity. Another mistake was using the 0.80 average beta (from 1996
to 2001), which does not accurately reflect future systematic risk. It is
preferable to use the most current beta (0.69)
The calculated WACC is 9.27% and the present value per share is $58.13
(15,782.295/271.5). This shows that the present value is higher by 1.38
times than Nike’s current market price of $42.09. The shares price of Nike
is undervalued by $16.04 (58.13-42.09) as Nike is presently trading in 2001
Based on these data, I advise the North Point Large-Cap Fund to
purchase Nike shares since they are now cheap and have a significant
growth potential that will be advantageous to the fund. Additionally, the
objectives that Nike Inc.'s management set might be a huge source of
wealth. Technical analysis backs up the purchase choice by also
considering how Nike Inc. shares have historically performed in
comparison to the market index. Nike has demonstrated in the past that it
can outperform market returns, and now that the market has declined,
there is still optimism for an increase based on the strategies already in
place.