Question

Determine the WACC for Nike Inc. using what you know about WACC as well as data you can find through research. it should be a brief report (2- 3 pages long) which states your determination of WACC, describe and justify how you determine the number and provide relevant information as to the sources of your data. A discussion of how much confident you are in your answer and the limiting assumptions you made. Use the following formula to determine WACC. As you recall, the formula for WACC is rWACC = (E / E + D) rE + D / (E + D) rD (1 - TC). The formula for the required return on a given equity investment is ri = rf + ?i * (RMkt - rf). RMkt - rf is the market risk premium. you may assume that the market risk premium is 4%, unless you can develop a better number. rf is the risk-free rate. The YTM on 10-year U.S. Treasury securities is a good approximation. You may assume a corporate tax rate of 40%.

Answer 1

WACC is weighted average cost of capital.

It is the average return a company anticipates to compensate its all stakeholders.

Stakeholders can be debt holders, bondholders, preferred stockholders, common stockholders.

Weighted average is used because different component of capital has different proportion in total capital.

Cost of Capital is the opportunity cost of capital i.e. the cost of next best available alternative.

WACC takes care of three components:

• Debt
• Preferred Stocks and
• Common Stocks

along with their weightage in the capital structure.

In order to use the WACC formula, we need to get

• Cost of Debt
• Cost of Equity
• Weightage of Debt
• Weighatge of Equity

To get Cost of Debt, we can use the formula:

Interest Expenses and Value of Debt can be found out from Income Statement of Nike Inc.

From Stock Analysis on Net, we get

As per Income Statement on 31 May, 2017

Interest Expenses = $ 86 millions

Value of Debt = $ 3471 millions

So, Cost of Debt = $86 / $ 3471

= 0.0247

= 2.47% (Converting into Percentage)

Cost of Equity = Risk Free Rate + * Market Risk Premium

Risk-Free Rate is assumed to be YTM on 10-year U.S. Treasury Securities.

According to treasury.gov , YTM on 10-year U.S. Treasury Securities as per 04/03/2018 is 2.79%

According to Yahoo Finance, Beta for Nike Inc. is 0.55 which means Stocks of Nike Inc. moves by $0.55 when market stocks move by $1.

//Market Risk Premium is assumed to be 4%

Putting the above researched data in the formula for Cost of Equity:

Cost of Equity = 2.79% + 0.55 * 4% = 4.99%

Now, we need to calculate the weightage of debt and weightage of equity in capital structure of Nike Inc.

As per Stock Analysis on Net for the financial Year 2016-17,

Value of Debt = $ 3471 millions

Value of Equity = $ 12407 millions

Weightage of Debt = $ 3471 / ( $ 3471 + $ 12407 ) = 0.2186

Weightage of Equity = 1 - Weightage of Debt = 0.7814   

// Weighatge of Debt + Weightage of Equity = 1

// Assuming Corporate Tax Rate = 40%

Now putting all the data in WACC formula,

WACC =  (E / E + D) rE + D / (E + D) rD (1 - TC)

= (0.7814 * 4.99% ) + ( 0.2186 * 2.47% ( 1 - 0.4))

= 4.2231 %