“Best Practices” in Estimating the Cost of
Capital: Survey and Synthesis
Nama Kelompok:
Matthew Victoria 37408003
Venny Dwiyanti 37408010
Inge Talia 37408018
Gentry DSG 37408039
Pengertian cost of capital
Cost of capital
sisi investor
sisi perusahaan
Sisi investor = opportunity cost dari dana yang ditanamkan
investor pada suatu perusahaan.
Sisi perusahaan = biaya yang dikeluarkan oleh
perusahaan untuk memperoleh sumber dana yang
dibutuhkan
•
Perhitungan cost of capital sangat penting karena:
1. Membantu perusahaan untuk melakukan bench mark
pada perusahaan lain yang cukup baik
2. Membantu membuat keputusan karena cost of capital
telah diestimasi
I. Weighted Average Cost of Capital (WACC)
• Untuk menghitung cost of capital kita menggunakan
WACC
• WACC adalah rata-rata tertimbang dari seluruh
komponen modal
• Komponen modal yg sering dipakai adalah: saham biasa,
saham preferen, utang, laba ditahan
• Seluruh komponen modal ( capital components)
mempunyai satu kesamaan, yaitu investor yang
menyediakan dana berharap untuk mendapatkan return
dari investasi mereka
Weighted Average Cost of Capital (WACC)
WACC = wd.kd (1-T)+wps.kps+ws.( ks atau ke)
kd
kps
ks
ke
T
= biaya hutang
= biaya saham preferen
= biaya laba ditahan
= biaya saham biasa baru
= pajak
Hal-hal yang diperhatikan dalam perhitungan
WACC
1. Capital cost yang ada menunjukkan kondisi pasar saat ini
bukan historical.
2. Bobot yang ada harus dari bobot pasar
3. Cost of debt harus dikurangi pajak Penggunaan hutang
sebagai modal, menurunkan penghasilan yg dikenai pajak
karena bunga yg harus dibayar. Karena itu penggunaan
hutang dapat mengurangi pajak yang dibayar (tax
deductible)
II. Sample Selection
Sample yang digunakan adalah perusahaan
Cara yang dilakukan dari sample ini adalah
1.Memberikan surat tentang penelitian
2. Lalu melakukan telepon.
Selain perusahaan,sampel yang lain adalah
Penasehat keuangan dan text book
III. Survey Findings
• Discounted cash flow (DCF) is the dominant investmentevaluation technique
• WACC is the dominant discount rate used in DCF
analyses
• Weights are based on market, not book, value mixes of
debt and equity
• The after tax cost of debt is predominantly based on
marginal pretax costs and marginal or statutory tax rates
• The capital asset pricing model (CAPM) is the dominant
model for estimating the cost of equity
Capital Asset Pricing Model
(CAPM)
Rf = Interest rate available on a risk free
bond
Rm = Return required to attract investors to hold the
broad market portfolio of risky assets
β = The relative risk of the particular asset
Risk free rate of return
• Choice of a risk free rate can have a material
effect on the cost of equity and WACC
• Long term bond yields more closely reflect default
free holding period returns available on long lived
investments and thus more closely mirror the
types of investments made by companies
Risk free rate of return
• Our survey results reveal a strong preference on the part of
practitioners for long term bond yields.
• Many corporations said they matched the term of risk free
rate to the tenor of the investment.
• Of both corporations and financial advisers, 70% use
treasury bond yield and only 4% of the corporations use the
treasury bill yield.
Beta Estimates
• Finance theory calls for a forward-looking beta, one
reflecting investor’s uncertainty about the future cash
flows to equity.
where:
Rit = Return on stock I in time period
Rmt = Return on the market portfolio in period t
αi = Regression constant for stock I
βi = Beta for stock i
Beta Estimates
Compromises underlying beta estimates and their effect on estimated betas
Of sample companies
Bloomberg
Value Line
Standard and
Poor’s
Number of
observations
Time interval
Market index
proxy
Sample mean
beta
Sample median
beta
102
260
60
Weekly over 2
years
S&P 500
1.03
1.00
Weekly over 5
years
NYSE composite
1.24
1.20
Monthly over 5
years
S&P 500
1.18
1.21
Over half of the corporations in our sample rely on published sources for their beta
estimates. Among financial advisers, 40% rely on published sources, 20% calculated
their own, and another 40% use what might be called “fundamental” beta estimates
Equity Market Risk Premium
• Finance theory says the equity market risk premium should
equal the excess return expected by investors on the market
portfolio relative to riskless assets.
• Where respondents chiefly differed was in their use of
arithmetic versus geometric average historical equity
returns.
• Arithmetic mean return is the simple average of past returns.
• The geometric mean return is the internal rate of return
between a single outlay and one or more future receipts.
Equity Market Risk Premium
• Of the texts and trade books survey, 71% support use of
the arithmetic mean return as the best surrogate for the
equity market risk premium.
• Ernhardt (1994) recommends use the geometric mean
return. Copeland, Koller, and Murrin (1990): “We believe
that the geometric average represents a better estimate of
investor’s expected returns over long period of time”
IV. The Impact of Various
Assumptions For Using CAPM
The resulting ranges of estimated WACCs for two
firms under various combinations of beta, risk free
rate, and risk premium :
The range from minimum to maximum is large
for both firms, and the economic impact is
potentially stunning.
V. Risk Adjustment To WACC
• Financial Theory : A firm’s overall WACC is a suitable
benchmark for a firm’s average risk investments.
• The fact :
• Earlier studies ( summarized in Gitman And Mercio
( 1982 )) reported that between a half of firms
surveyed did not adjust for risk differences among
capital project
• When asked about risk adjustment, these firms
responded as follows :
• “We make these adjustment in cash flow
rather than in discount rates”
• “Risk factor may be different for realization
of synergies, but we make adjustment to
cash flow rather than the discount rates”
• Why do practitioners risk-adjust discount rates in one
case and work with cash-flow adjustment in another ?
• Our interpretation is that risk-adjusted discount rates are more
likely used when the analyst can establish relatively objective
financial market benchmark for what rate adjustment should be
• Sometimes when the analyst is lack of good market analog, the
analyst is forced to rely more on internal focus
• The conclusion : Practical implementation of risk adjusted
discount rates thus appear to depend on the ability to find
traded financial assets that are comparable in risk to the cash
flow being valued and then to have financial data on these
traded asset.
VI. Conclusions
• The survey revealed broad acceptance of the WACC as the basis
for setting discount rates.
• In summary, we believe that the following elements represent “best
current practice” in the estimation of WACC :
• Weight should be based on market-value mixes of debt and
equity
• The after-tax cost of debt should be estimated from marginal
pretax costs, combined with marginal tax rates
• CAPM is currently the preferred model for estimating the cost of
equity
• Betas are drawn substantially from published sources
• Risk-free rate should match the tenor of the cash
flow being valued
• Choice of an equity market risk premium is the
subject of considerable controversy both as to its
value and method of estimation
• Monitoring for changes in WACC should be keyed to
major changes in financial market conditions, but
should be done at least annually
• WACC should be risk adjusted to reflect substantive
differences among different business in a
corporation
Nike Inc.
Cost of capital
Background
• Pada bulan Juli 2001 , Kimi Ford seorang manajer portofolio
dari North Point Group berencana untuk membeli saham Nike
yang merupakan manufaktur sepatu olahraga .
• Harga Saham Nike sedang turun secara signifikan sejak awal
tahun dan Kimi berencana untuk menambah jumlah saham
dalam pengelolaanya yaitu NorthPoint Large-Cap Fund , yang
telah berinvestasi di 500 perusahaan besar seperti
ExxonMobil,GM,Mcdonald,dsb .
• Performa NorthPoint Large-Cap Sangat bagus di tahun 2000
yaitu mendapat return 20,7% saat return S&P 500 turun 10.1%.
Pada tanggal 28 juni 2001 , Nike mengadakan meeting
untuk membahas kinerjanya di tahun 2001 yang dirasa
kurang maksimal yaitu :
• Sejak tahun 1997 revenue nike tetap berkutat di kisaran
$9 Billion .
• Net income yang menurun dari $800 million di tahun
1997 menjadi $580 million di tahun 2001 .
• Market Share Nike yang menurun dari 48% di tahun
1997 menjadi 42% di tahun 2000.
Rencana kebijakan Manajemen yang diambil oleh Nike
yaitu :
• Untuk meningkatkan Revenue Nike berencana
mengembangkan sepatu olahraga di midpriced segment
(segmen tengah).
• Nike berencana untuk mendorong produk Pakaian
(apparel) karena dirasa mampu bersaing di pasar.
• Nike akan mengusahakan cost control yang lebih efisien
dari tahun ke tahun.
• Nike merencanakan Long Term Revenue Target
sebesar 8-10% dan Earning Growth target Sebesar
15%
Reaksi Analis terhadap kebijakan tersebut berbeda-beda :
• Lehman Brothers pada saat itu merekomendasikan “Strong
Buy”.
• CSFB dan UBS Warburg merekomendasikan “Hold”.
Kimi kemudian menghitung DCF forecast dan menemukan
kesimpulan bahwa dengan Discount Rate 12% maka harga
saham Nike pada saat itu ($42.09) adalah Overvalued dan
jika Discount Rate dibawah 11.2% maka harganya
Undervalued.
Maka dari itu kimi meminta Joanna Cohen untuk
mengestimasi Cost of Capital dari Nike .
Consolidated Income Statement
Income Statement
1995
1996
1997
1998
1999
2000
2001
Revenues
4,760.8
6,470.6
9,186.5
9,553.1
8,776.9
8,995.1
9,488.8
COGS
2,865.3
3,906.7
5,503.0
6,065.5
5,493.5
5,403.8
5,784.9
Gross Profit
1,895.5
2,563.9
3,683.5
3,487.6
3,283.4
3,591.3
3,703.9
Selling and Admin
1,209.8
1,588.6
2,303.7
2,623.8
2,426.6
2,606.4
2,689.7
Operating Income
685.7
975.3
1,379.8
863.8
856.8
984.9
1,014.2
Interest Expense
24.2
39.5
52.3
60.0
44.1
45.0
58.7
Other Exp.
11.7
36.7
32.3
20.9
21.5
23.2
34.1
-
129.9
45.1
(2.5)
-
Restructuring Charge,net
-
-
Income before Taxes
649.8
899.1
1,295.2
653.0
746.1
919.2
921.4
Income Taxes
250.2
345.9
499.4
253.4
294.7
340.1
331.7
Net Income
399.6
553.2
795.8
399.6
451.4
579.1
589.7
Growth & Margins
Growth(%)
1996
1997
1998
1999
2000
2001
Revenue
35.9
42.0
4.0
(8.1)
2.5
5.5
Operating Income
42.2
41.5
(37.4)
(0.8)
15.0
3.0
Net Income
38.4
43.9
(49.8)
13.0
28.3
1.8
Margin(%)
1996
1997
1998
1999
2000
2001
Gross Margin
39.6
40.1
36.5
37.4
39.9
39.0
Operating Margin
15.1
15.0
9.0
9.8
10.9
10.7
Net Margin
Tax Rate
(Statutory+State)
8.5
8.7
4.2
5.1
6.4
6.2
38.5
38.6
38.8
39.5
37.0
36.0
Assumptions & DCF Analysis
Assumptions (%)
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
Rev. Grwoth
7.0
6.5
6.5
6.5
6.0
6.0
6.0
6.0
6.0
6.0
COGS/Sales
60.0
60.0
59.5
59.5
59.0
59.0
58.5
58.5
58.0
58.0
S&A/Sales
28.0
27.5
27.0
26.5
26.0
25.5
25.0
25.0
25.0
25.0
Tax Rate
38.0
38.0
38.0
38.0
38.0
38.0
38.0
38.0
38.0
38.0
CA/Sales
38.0
38.0
38.0
38.0
38.0
38.0
38.0
38.0
38.0
38.0
CL/Sales
11.5
11.5
11.5
11.5
11.5
11.5
11.5
11.5
11.5
11.5
1,218.4
1,351.6
1,554.6
1,717.0
1,950.0
2,135.9
2,410.2
2,554.8
2,790.1
2,957.5
463.0
513.6
590.8
652.5
741.0
811.7
915.9
970.8
1,060.2
1,123.9
755.40
838.00
963.80
1,064.50
1,209.00
1,324.20
1,494.30
1,584.00
1,729.90
1,833.60
-
-
-
-
-
-
-
-
-
Discounted Cash Flow
Operating Income
Taxes
NOPAT
CAPEX,net of dep
Change In NWC
FCF
-
8.8
(174.9)
(186.3)
(198.4)
(195.0)
(206.7)
(219.1)
(232.3)
(246.2)
(261.0)
764.20
663.10
777.50
866.10
1,014.00
1,117.50
1,275.20
1,351.70
1,483.70
1,572.60
Terminal Value (3%)
17,998.7
Total Flows
764.20
663.10
777.50
866.10
1,014.00
1,117.50
1,275.20
1,351.70
1,483.70
19,571.30
PV of Flows (12%)
682.32
528.62
553.41
550.42
575.37
566.16
576.84
545.93
535.04
6,301.43
Enterprise Value
11,415.54
Current Outstanding Debt
1296.6
Equity Value
10,118.94
Current Shares Outstanding
271.5
Equity Value PerShare
Current Share Price
$
$
37.27
42.09
Sensitivity
Discount Rate
Equity Value
8%
$
75.80
8.50%
$
67.85
9%
$
61.25
9.50%
$
55.68
10%
$
50.92
10.50%
$
46.81
11%
$
43.22
11.17%
$
42.09
11.50%
$
40.07
12%
$
37.27
Consolidated Balance Sheet
Balance Sheet , May 31
Assets
Current Assets :
Cash
Acc Recievable
Inventories
Deffered Income Taxes
Prepaid Exp
Total Current Asset
Property,Plant,Equipment
Intangible Asset&Goodwill
Deffered Income Taxes
Total Assets
2000
2001
254.3
1,569.4
1,446.0
111.5
215.2
3,596.4
1,583.4
410.9
266.2
5,856.9
304.0
1,621.4
1,424.1
113.3
162.5
3,625.3
1,618.8
397.3
178.2
5,819.6
Balance Sheet , May 31
Liabilities & Equity
Curent Liabilities :
Current Long-term Debt
Notes Payable
Acc Payable
Accrued Liabilities
Income Tax Payable
Total Current Liabilities
Long Term Debt
Deffered Income Taxes
Redeemable Pref Stock
Total Liabilities
Equity :
Common Stock
Capital in Exces of stated Value
Unearned Compensation
Accumulated Other Income
Retained Earnings
Total Equity
Total Liabilites And Equity
2000
2001
50.1
924.2
543.8
621.9
2,140.0
470.3
110.3
0.3
2,720.9
5.4
855.3
432.0
472.0
21.9
1,786.6
435.9
102.2
0.3
2,325.0
2.8
369.0
(11.7)
(111.1)
2,887.0
3,136.0
5,856.9
2.8
459.4
(9.9)
(152.1)
3,194.3
3,494.5
5,819.5
Financial Information
Current Yield on US
Treasuries
Historical Equity Risk
Premium (1926-2000)
3 Month
3.59%
Gemotric Mean
5.90%
6 Month
3.59%
Arithamtic Mean
7.50%
1 Year
3.59%
5 Year
4.88%
Current Yield on Nike
Debt
10 Year
5.39%
Coupon
20 Year
5.74%
Issued
Maturity
Nike Average Historic
Betas
1996-2000
Current Price
0.8
Semi
6.75%Annual
7/15/19
96
7/15/20
21
$ 95.6
Joanna Cohen’s Analysis
• A. Single atau Multiple Cost of Capital ?
Cohen menggunakan Single Cost of Capital karena dia berasumsi meskipun
Nike memproduksi beraneka ragam produk seperti Sepatu, Pakaian , Bola ,
Kacamata , Aksesoris , dan Perlengkapan Olahraga lainya tetapi sebagian
besar adalah Bisnis dalam bidang Olahraga dan produksi yang diluar
olahraga hanya menyumbang revenue yang kecil . Dan Juga distribusi dan
Marketingnya tetap berada pada satu Channel.
• B. Methodology Perhitungan Weight
Capital Sources
Debt
Current Long-Term Debt
Notes Payable
Long Term Debt
Total Debt
Equity
Total Capital
Book Values
5.4
855.3
435.9
1296.6
3494.5
4791.1
27%
73%
• C. Cost of Debt
Cohen menggunakan Cost of Debt dengan perhitungan interest
expense / average debt balance sehingga menghasilkan Cost of Debt
sebesar 4.3%
• D. Cost of Equity
CAPM = RF + B *RPM
= 5.74% + 0.8 * 5.9%
= 10.5%
• E. WACC
WACC = Kd (1-t) * Wd + Ke * We
= 4.3 * (1-38%) * 27% + 10.5% * 73%
= 8.4%
Jan-01
Apr-01
Jul-01
Oct-01
Jan-02
Apr-02
Jul-02
Oct-02
Jan-03
Apr-03
Jul-03
Oct-03
Jan-04
Apr-04
Jul-04
Oct-04
Jan-05
Apr-05
Jul-05
Oct-05
Jan-06
Apr-06
Jul-06
Oct-06
Jan-07
Apr-07
Jul-07
Oct-07
Jan-08
Apr-08
Jul-08
Oct-08
Jan-09
Apr-09
Jul-09
Oct-09
Jan-10
Apr-10
Jul-10
Oct-10
Nike Share Price
Price
99.03
90.69
55.02
41.99
56.24
53.65
53.49
86.6 86.79
75.75
81
81.1
68.46
64.24
58.29
66.07 67.55
59.61
51
51.78
44.47
Group’s Analysis 2010
Total Revenue
Cost of Revenue, Total
Gross Profit
2010
2009
2008
2007
2006
19,014.00 19,176.10 18,627.00 16,325.90 14,954.90
10,213.60 10,571.70 10,239.60 9,165.40 8,367.90
8,800.40 8,604.40 8,387.40 7,160.50 6,587.00
Selling/General/Administrative Expenses, Total
Research & Development
Depreciation/Amortization
Interest Expense (Income), Net Operating
Unusual Expense (Income)
Other Operating Expenses, Total
Operating Income
6,326.40
0
0
0
0
-12.8
2,516.90
6,149.60
0
0
0
596.3
-48.3
1,956.50
5,953.70
0
0
0
0
46.6
2,502.90
5,028.70
0
0
0
0
48.8
2,199.90
4,477.80
0
0
0
0
54.9
2,141.60
Interest Income (Expense), Net Non-Operating
Gain (Loss) on Sale of Assets
Other, Net
Income Before Tax
0
0
0
2,516.90
0
0
0
1,956.50
0
0
0
2,502.90
0
0
0
2,199.90
0
0
0
2,141.60
Income Tax - Total
Income After Tax
610.2
1,906.70
469.8
1,486.70
619.5
1,883.40
708.4
1,491.50
749.6
1,392.00
Minority Interest
Equity In Affiliates
U.S. GAAP Adjustment
Net Income Before Extra. Items
0
0
0
1,906.70
0
0
0
1,486.70
0
0
0
1,883.40
0
0
0
1,491.50
0
0
0
1,392.00
Total Extraordinary Items
Net Income
0
1,906.70
0
1,486.70
0
1,883.40
0
1,491.50
0
1,392.00
Assets
2010
2009
2008
2007
2006
Cash and Short Term Investments
Cash & Equivalents
Short Term Investments
5,145.90
3,079.10
2,066.80
3,455.10
2,291.10
1,164.00
2,776.10
2,133.90
642.2
2,847.00
1,856.70
990.3
2,303.00
954.2
1,348.80
Total Receivables, Net
2,649.80
2,883.90
2,795.30
2,494.70
2,382.90
Accounts Receivable - Trade, Net
2,649.80
2,883.90
2,795.30
2,494.70
2,382.90
Accounts Receivable - Trade, Gross
2,766.50
2,994.70
2,873.70
2,566.20
2,450.50
Provision for Doubtful Accounts
Total Inventory
Prepaid Expenses
Other Current Assets, Total
Total Current Assets
-116.7
2,040.80
873.9
248.8
10,959.20
-110.8
2,357.00
765.6
272.4
9,734.00
-78.4
2,438.40
602.3
227.2
8,839.30
-71.5
2,121.90
393.2
219.7
8,076.50
-67.6
2,076.70
380.1
203.3
7,346.00
Property/Plant/Equipment, Total - Net
Goodwill, Net
Intangibles, Net
Long Term Investments
1,931.90
187.6
467
0
1,957.70
193.5
467.4
0
1,891.10
448.8
743.1
0
1,678.30
130.8
409.9
0
1,657.70
130.8
405.5
0
Note Receivable - Long Term
0
0
0
0
0
Other Long Term Assets, Total
Other Assets, Total
Total Assets
873.6
0
14,419.30
897
0
13,249.60
520.4
0
12,442.70
392.8
0
10,688.30
329.6
0
9,869.60
Liabilities and Shareholders' Equity
2010
2009
2008
2007
2006
1,254.50
0
1,610.10
1,031.90
0
1,593.60
1,287.60
0
1,089.30
1,040.30
0
876.9
952.2
0
968.8
138.6
342.9
177.7
100.8
43.4
7.4
32
6.3
30.5
255.3
353.6
276.6
760.6
535.5
392.7
3,364.20
3,277.00
3,321.50
2,584.00
2,612.40
Total Long Term Debt
Long Term Debt
Deferred Income Tax
445.8
445.8
855.3
437.2
437.2
842
441.1
441.1
854.5
409.9
409.9
668.7
410.7
410.7
561
Minority Interest
Other Liabilities, Total
Total Liabilities
0
0
4,665.30
0
0
4,556.20
0
0
4,617.10
0
0
3,662.60
0
0
3,584.10
0.3
0.3
0.3
0.3
0.3
Preferred Stock - Non Redeemable, Net
Common Stock
Additional Paid-In Capital
0
2.8
3,440.60
0
2.8
2,871.40
0
2.8
2,497.80
0
2.8
1,960.00
0
2.8
1,447.30
Retained Earnings (Accumulated Deficit)
Other Equity, Total
Total Equity
6,095.50
214.8
9,754.00
5,451.40
367.5
8,693.40
5,073.30
251.4
7,825.60
4,885.20
177.4
7,025.70
4,713.40
121.7
6,285.50
Total Liabilities & Shareholders’ Equity
14,419.30
13,249.60
12,442.70
10,688.30
9,869.60
Accounts Payable
Payable/Accrued
Accrued Expenses
Notes Payable/Short Term Debt
Current Port. of LT Debt/Capital Leases
Other Current Liabilities, Total
Total Current Liabilities
Redeemable Preferred Stock
Cost of Capital
• A. Methodology Perhitungan Weight
Capital Sources
Debt :
Current Long-term Debt
Notes Payable
Long Term Debt
Equity
Total Capital
BV
7.40
138.6
445.8
591.80
9,754.00
10,345.80
• B. Cost of Debt
YTM Valuation
Bond Price 95.6 , n=40 , coup = 6.75%/2
YTM = 3.58*2 = 7.16%
5.7%
94.3%
• C. Cost of Equity
CAPM = RF + B *RPM
= 4.12% + 0.96 * (7.5%-4.12%)
= 7.3648%
• D. WACC/Cost of Capital
WACC = Kd (1-t) * Wd + Ke * We
= 7.16% * (1-38%) * 5.7% + 7.36% * 94.3%
= 7.19%
Nike’s Stock Value
Operating Income
Taxes (38%)
NOPAT
CAPEX
Change in NWC
FCF
Enterprise Value (6%)
Debt
Equity Value
Shares Outstanding
Stock Value
Enterprise Value (6.25%)
Debt
Equity Value
Shares Outstanding
Stock Value
2010
2,516.90
956.422
1,560.48
-49.2
1138
471.68
43101.61
591.8
42509.81
484
$87.83019
55072.29
591.8
54480.49
484
$112.563
2009
1,956.50
743.47
1,213.03
443.2
939.2
-169.37
2008
2,502.90
951.102
1,551.80
340.4
25.3
1,186.10
2007
2,199.90
835.962
1,363.94
83.8
758.9
521.24
Current Price
$81.1
2006
2,141.60
813.808
1,327.79