Cost of debt

Cost of preferred stock

Cost of retained earnings
Cost of new common stock
The capital structure is the particular combination of debt and equity used by a
company to finance its overall operations and growth. Debt comes in the form
of bond issues or loans, while equity may come in the form of common
stock, preferred stock, or retained earnings

Because they are money owed by the company, both short and long-term notes
payable are considered liabilities. Short-term notes payable fall under current liabilities,
and long-term notes payable fall under long-term liabilities.

Another difference between short-term and long-term notes payable is whether or not
they are accounted for in a company’s capital structure. While they are both a form
of debt capital, only long-term liabilities (and therefore long-term notes payable) are
considered a part of a company’s capital structure.
Shares outstanding in 2001 273.3
Current Share Price (P0) $42.09 Total shareholders' equity 3494.5

Market Value of Equity $11,503.20 Long Term Debt 435.9

Current outstanding Debt $1,296.60 Total Capital 3930.4

Total Value $12,799.80
We 88.91%
We 89.8702% Wd 11.09%
Wd 10.13%
Exhibit 3
 KUNCI

Current Price $ 95.60

Issued Date 15/7/1996

Maturity Date 15/7/2021
2001 Coupon Rate 6.75% per tahun dibagi dua kali dalam setahun
Par Value $ 100.00

Present Value $ (95.60)

N 40 20
PMT $ 3.375 6.75
Face Value $ 100.00

r 3.58% 7.17%
rate annual 7.17%

After tax cost of debt 4.444%

BUKU

Par value -100

Coupon interest rate 6.75%
Interest payments per year 2
Interest payment -6.75
Number of years to maturity 20
Net proceeds from sale of bond 95.6
Before-tax cost of debt 7.08%

After tax cost of debt 4.39%

Using historical data doesn’t reflect Nike’s current or future cost of debt, therefore
Cohen’s cost of debt calculation which was done by taking the total interest expense
for 2001 and dividing it by the company’s average debt balance is wrong. She
should have instead calculated the yield to maturity on a 20-year debt basis with a
coupon rate that is paid semiannually.

Before tax rate (cohen)

Cohen

58.7
2741.2
1370.6
4.3%
CAPM

Risk-Free Rate (Rf) 5.74% 20 year current yield on US Treasuries

Equity Risk Premium (Rm - Rf) 5.90% Geometric Mean of Historical Risk Premiums
Return on Market (Rm) 11.64% Equity Risk Premium + Risk-Free Rate
Beta (b) 0.69 Most recent value of beta

Cost of Equity (Re) 9.811% Re = Rf + b(Rm-Rf)

DDM

Dividend (D0) 0.48 Dividend for the year 2000

Growth Rate (g) 5.50% given
Next Dividend (D1) 0.5064 D1 = D0*(1+g)
Current Stock Price (P0) $42.09

Cost of Equity (Re) 6.70% Re = D1/P0 + g

Based on the above calculations,

we can see that after June 30, 2001
the company did not pay any
dividends to its shareholders, so
this model (DDM) is not useful
since it doesn’t reflect the intrinsic
cost of capital.

ECR

Projected EPS for next year (E 1) $2.32

Current Stock Price (P0) $42.09

Cost of Equity (Re) 5.51%

This model is not recommended due to that that it ignores the potential growth of the firm
 on US Treasuries we used the 20-year treasury bond rate (5.74%) to represent the risk free rate as this
rate is considered the longest one available. Choosing the 20-year rate is the most
Historical Risk Premiums applicable, since the CoE and the WACC are actually used to discount cash flows in
the long-term as well as the WACC calculations below depend on a mix of debt and
+ Risk-Free Rate equity weights both being long-term. Another reason why choosing this maturity is
that long-term is better than short-term as the cumulative from 20-years is accurate
that a 1-year figure. So the Rf used is equal to 5.74%.
The next step is to find the market risk premium, we used from the historical equity
risk premium. The geometric mean is (5.90%) as it is actually compounded the
returns where as the arithmetic mean can actually overstate the return. So the risk
premium = 5.90%.

The beta used is the most recent one for 6/30/01 which is equal to 0.69.
Risk-Free Rate (Rf) 5.39%
Equity Risk Premium (Rm - Rf) 5.90%
Return on Market (Rm) 11.29%
Beta (b) 0.69

Cost of Equity (Re) 9.461%

 Using CAPM Using DDM Using ECR

We 89.87% We 89.87% We
Wd 10.13% Wd 10.13% Wd
Cost of Debt Rd 4.39% Cost of Debt Rd 4.39% Cost of Debt Rd
Cost of Equity (Re) 9.81% Cost of Equity (Re) 6.70% Cost of Equity (Re)
Tax (t) 38% Tax (t) 38% Tax (t)

WACC 9.262% WACC 6.30% WACC

The tax rate that was taken was the same as what Joanna Cohen took which was computed by adding the US statut

Enterprise Value $17,106.50

Curent outstanding debt $1,296.60
Equity Value $15,809.90
# of shares outstanding 271.5
Equity Value per share $58.23 Current

1 GAP Valuer/share $16.14

Nike Changed their business technique by focusing in mid-priced segment, which for a long time
was less concentrated. This means that there is a possibility for their sales total to increase that
that will lead to an increase in revenues and profit. In addition to this Nike’s share prices and
dividend will be increased in the long-term.

2
Based on these records, we recommend to the North Point Large-Cap Fund to buy Nike’s shares,
because the stock is currently undervalued and it has a major growth potential that will be
beneficial to the fund. In addition to this, the goals that were set by the management of Nike Inc.
could be a great source of profit. Also by the past performance of Nike Inc. shares against the
market index, technical analysis supports the buy decision. The past performance shows that
Nike can out preform the current market returns and now that it has gone down, it is left with the
hope for an increase based on the plans being set up.

Conclusion
In conclusion, before buying Nike Inc. shares, Kimi Ford must decide whether she wants the
shares for long or short term. If it is for the long-term, then the decision to invest is a good one
and if it is for the short-term she should be cautious about the fast changing industry the changes
that Nike is doing and also changes in the footwear trends. However, based on historical, recent
and future data the decision that Kimi should consider that is to buy Nike’s shares for the reason
that it is quite safe, currently undervalued and has great potential.
 89.87%
10.13%
4.39%
5.51%
38%

5.23%

uted by adding the US statutory tax rate with the state taxes (35%+3% = 38%), so the tax rate taken is 38%.

42.09 undervalued

27449.39
Soal FCF $ 764.10 $ 663.10 $ 777.60 $ 866.20 $ 1,014.00 $ 1,117.60
Terminal

Untuk soal kita

FCF $ 764.10 $ 663.10 $ 777.60 $ 866.20 $ 1,014.00 $ 1,117.60

Terminal

Total Flow 764.10 663.10 777.60 866.20 1,014.00 1,117.60

$ 1,275.20 $ 1,351.70 $ 1,483.70 $ 1,572.70
$ 17,998.68

$ 1,275.20 $ 1,351.70 $ 1,483.70 $ 1,572.70

$ 25,876.69

1,275.20 1,351.70 1,483.70 27,449.39