If markets are efficient, market values will equal present value of cash flows. Book values, on the other hand, represent
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WACC= (%of debt) (after-tax cost of debt) + (% of preferred stock)(Cost of preferred stock) + (% of common equity) (Cost of common equity)…
The comptroller currently finds the weights for the weighted average cost of capital (WACC) from information from the balance sheet shown in Table 2. Compute the book value weights that the comptroller currently uses for the company’s capital structure.…
Explanation: Book value is its value on paper, but does not accurately reflect the true market value.…
7. Shi Importers' balance sheet shows $300 million in debt, $50 million in preferred stock, and $250 million in total common equity. Shi faces a 40% tax rate and the following data: rd _ 6%, rps _ 5.8%, and rs _ 12%. If Shi has a target capital structure of 30% debt, 5% preferred stock, and 65% common stock, what is Shi's WACC?…
Although it appears that Nike has some inventory management problems, they are clearly growing their net income year over year. From the company perspective, they are effectively leveraging their assets to yield favorable increases in profit year over year, but from the stockholder’s perspective, they are effective leveraging their equity. This shows that although competition increases in the market, Nike’s brand remains relevant and desired within its primary markets. Nike can leverage their brand recognition, liquid capital, and their room for additional risk to focus on their e-commerce platforms, emerging markets, and women’s product…
1.a) To value Spyder Active Sports Inc., we decided to use the WACC method since we can easily value its cost of assets with the data immediately available to us in the case. We first unlevered the beta’s of 7 comparable companies and took the average to get a comparable unlevered beta for Spyder (Exhibit 1). Since we are assuming Spyder is entirely equity financed, its unlevered asset beta is equal to the beta of its assets. We now have a rough estimate of Spyder’s asset beta, we can use CAPM to calculate the cost of assets of the firm (Exhibit 2). With an appropriate discount rate, we can use the WACC method to discount the company’s projected cash flows. Again, since the company is entirely comprised of equity, the cost of assets is the cost of the entire firm, so we will use it in place of WACC. Using Spyder’s pro-forma income statement, we then calculate the FCF’s for the next 4 years and discount those using our cost of assets (Exhibit 3).…
In my analysis, I will argue about choosing different numbers than Cohen to get a more accurate WACC. For the calculation of debt cost of capital, I used the current yield on publicly traded Nike debt to get a market value for the debt and not the book. Having the 6.75% coupon rate paid semiannually, 20 years to maturity, and the current price of $95.60, the debt cost of capital would be estimated at 7.17%. for the calculation of the equity cost of capital, I used CAPM. The three components are the risk free premium, the Beta value, and the market risk premium. I chose a 3-month yield on Treasury bills as the risk free premium since it is the safest and…
Who would have imagined it? After years on top, Nike suddenly looks like a world-class marathoner who, in midrace, questions whether he's got what it takes to keep on running. Nike's symptoms of distress: a global glut of shoes, flat sales in key markets, and declining profits. Moreover, the global brand champ that captured its own winning corporate mindset with the "Just do it" ad slogan has a new pitch, "I can"--to which investors seem to be retorting, "No, you can't." Losing faith, they have knocked Nike stock from its all-time high of $76 about a year ago to a recent $46.…
The WACC is the appropriate method for valuing Nike’s capital. The WACC takes your cost of debt x the percent of capital + CAPM x equity percent of capital and it tells the rate of return the company needs to return based on its capital structure. In my opinion Ms. Ford has correctly assumed Nikes cost of debt and cost of equity. Her projection for cost of debt uses the Japanese yen notes ranging from 2.0%-4.3%. Since she used the higher range of 4.3%, that will eliminate any overly optimistic projections and should leave us with a realistic assumption. Some people can argue that she should of used the multiple costs of capital approach since Nike operates in many different sectors within the sporting apparel industry; however, when you break down their sales into categories like she did it is evident that using the singular approach was adequate for this analysis.…
The most obvious reason for the difference between the market value of equity and the book value of equity is the inability to record certain intangible assets such as brand value, customer loyalty, and perhaps most importantly, human capital. These intangible assets are likely to provide tremendous earnings growth in the future which determines the company’s market value. Notice also that the company’s choice of conservative accounting policies has the effect of depressing the company’s book value of equity.…
Johnson also opened the first retail store in California and is credited with providing Nike with its name. In 1971 the swoosh trademark was created for a minimal fee of only thirty five dollars by a graphic design student named Carolyn Davidson. By 1972, new athletic footwear was introduced by Blue Ribbon Sports and called Nike. The Blue Ribbon Sports Company had business relations with Onitsuka Tiger for nearly ten years and in 1972 the two hit a bump in the road. Due to a dispute over distribution there was an eventual sever in business dealings between the two companies. That same year the Nike line of footwear made its debut in February at a Chicago sporting goods show. At the 1972 Olympic trials Nike “moon shoes” were introduced featuring the new waffle sole. Along with these new shoes, t-shirts were also being worn bearing the Nike logo. This new brand began to spark an interest. Later that year, Nike signed its first endorsement contract with the Romanian tennis star, Ilie Nastase.…
The purpose of this paper is to provide investors with comprehensive information on Nike, its financial health and activities, its strength and weaknesses, and whether Nike creates value to its shareholders. This paper will analyze Nike's capital structure, scope of international operations, recent stock performance, and dividend policy. We will examine how Nike's international operations are conducted, its criticisms and strengths. Nike's debt ratios, dividend payout ratios, dividend yield, and interest coverage ratios over the previous 5 years will be discussed and compared with industry benchmarks. Its bond ratings and the relation between the operating characteristics and its leverage will also be analyzed.…
After discounting Nike’s cash flows using the WACC value we calculated, we believe that Nike is undervalued by $2.51 per share of stock. Also, Nike’s terminal value of cash flows is greater than the equity value of the firm. (Exhibit 3). We think that they should invest because the price of Nike’s…
Nike’s revenues since 1997 had grown from $9 billion, while net income had fallen $220 million. A study written by Douglas Robson printed in Business Week revealed that Nike’s market share in the U.S. athletic shoe industry had fallen from 48 percent to 42 percent since 1997. In addition, supply-chain issues and the effects of a strong dollar negatively affected revenues. In the meeting, management planned to increase revenues by developing athletic-shoe products in ranges varying between $70-$90 and push their apparel line. Nike’s executives expressed that the company would still continue with a long-term revenue growth target of 8-10 percent and earnings-growth target above 15 percent.…
E(R M ) − R F E(R Portfolio ) = R F + * SD Portfolio SD M…