Nike In Cost of Capital Case Study Example | Topics and Well Written Essays - 1000 words

Nike In Cost of Capital - Case Study vitrineFrom this paper, it is clear that a companys cost of working capital is apply to a company since it evaluates the outlay of an investment. The worth of an investment establishes the expected return on similar capital invested in an alternative investment. The cost of capital is not only required in making investment decisions but it is also used to make attention decisions. Management decisions are based on financial implications and expectations of a company. The cost of capital determines financial expatiations of a company through capital and, therefore it is essential in making management decisions. A companys cost of capital is, therefore, a useful tool in the decision-making process. I do not concur with Joanna Cohens value for WACC since it has considerable limitations. Cohens unhurriedness also had round errors and hence the company cannot rely on the value to make critical financial decisions. Although Cohens calculation of Nikes WACC was analytical, it has some weakness and hence inappropriate. In her calculations, Cohen weighted the capital structure based on book values. This was inappropriate since the company is a public liability company, and the values of its market capitalization come greater significance than the value of its book equity. Her Cost of debt was also wrongly calculated Cohen obtained her cost of debt by determining the ratio between interest expense and interest-bearing debt. In some case, interest expenses brook expenses that are not covered or related to the companys debt.s debt. This might work introduced some errors in her final WACC value. Cohen also used 5.9% as her market premium this figure was significantly low. Cohen also obtained a wrong value for her WACC this is because she weighted all her divisions using revenue instead of currency flow. This factor contributed to the margin between her WACC value and the expected value. Her calculation of weights also did not accommodate the polar products that the company produces. This is because her weight did not consider all the footwear that Nike produces. Although the company makes most of its sales from playing period shoes, other types of footwear contribute significantly to the sales of the company. WACC = Cost of Equity + Cost of Debt = (We) (Ke) + Wd (Kd) (1-t) Where Wd = loan capitals, We = pay from equity, Kd =bank