Case Analysis By Cohen

Current Portion of Long

tern Debt 5.4 1)

Notes Payable 855.3 2)

Long Term Debt 435.9

Total Debt (2001) 1296.6 3)

Total Equity 3494.5 4)

Total Capital 4791.1 5)

Weight Of Debt 0.2706

Weight Of Equity 0.7294

Cost of Equity (CAPM) 0.105

Tax Rate 0.38

Cost of Debt (Pre-Tax) 0.043

Risk Premium 0.059

Beta 0.8
Cost of Debt (After-Tax) 0.0267
WACC 0.0838
Our Analysis Of The Case

The reason for estimate

of WACC is to value the
cash flows for the entire Current Share
firm. Price 42.09

Business Segments of Average

Nike have about the Outstanding
same risk. Shares 273.3

Current Portion
A single cost of capital Of Long Term
is sufficient for analysis Debt 855.3

She made a mistake by

estimating firm's cost of
debt by taking into
calculation the historical
data. Long Term Debt 435.9

Every component of
WACC must reflect the
future interest rate the
firm has obligations to Market Value Of
pay. Equity 11503
 Taken Due to lack
of information
regarding market
value of debt.

Cost of Capital is based

on book value and not Book Value Of
on the market value. Debt 1291.2
New Weight Of
Debt 0.1009
New Weight Of
Equity 0.8991

We can calculate the

current yield to maturity
of Nike's bond to
reprsent the current
cost of Debt.
US Treasury
Current Yield (20
year) 0.0574
Better for long
term period
Risk Premium 0.059 valuation
Pre-Tax Cost of Debt ###
We need to
calculate a beta
value that is
most
representative of
After-Tax Cost of Debt 0.0445 the future beta.
Beta Value
Cost of Equity
WACC
 Recommendation
s
Nike was
undervalued at
discounnt rate
1) below 11.17%.
12% gave a
share price of
37.37 , so
overvalued by
2) 4.82
Discounting with
WACC 9.27%,
present value
will come around
58.13, much
higher than
3) 42.09

Nike would loved

to focus more
upon mid-price
segment. Their
total sales might
increase,
revenue
increase, profits
increase and
dividend will
increase in the
4) long run.
BUY Nike's share
as it is
undervalued, it
has growth
potential and
would be
beneficial for
5) fund.
 Long term is a
wondeful
investment but
she should also
monitor
activities
properly and
should see short
term changes in
industry ,
footwear etc and
take decisions
6) appropriately.

0.69
0.0981
0.0927