*Case Study: NIKE, INC: COST OF CAPITAL
Length: 8 pages
ASSIGNMENT QUESTIONS.
1.What is the WACC and why is it important to estimate a firm’s cost of capital? What does it
represent? Is the WACC set by investors or by managers? Do you agree with Joanna Cohen’s
WACC calculation? Why or Why not?
2.If you do not agree with Cohen’s analysis, calculate your own WACC for Nike and be prepared to
justify your assumptions.
3.What was your estimate of WACC? What mistakes did Joanna Cohen make in her analysis?
Which method is best for calculating the cost of equity?
4. Calculate the costs of equity using CAPM, the Dividend Discount Model, and the Earnings
Capitalization ratio. What are the advantages and disadvantages of each model?
5. What should Kimi Ford recommend regarding an investment in Nike?
When you or your group answers the above questions, make sure you show all the work
done to reach your conclusion/s. Any calculations done must be incorporated in the
answers. Remember the case carries 15% weight towards your final grade.
*See the attached file how to order the Case from Ivey.
This case is intended to serve as an introduction to the calculation of the weighted-average cost of capital
(WACC) of the firm. The case provides a WACC calculation that contains errors based on conceptual
misunderstandings. The task of the students is to identify and explain the mistakes in the analysis. The
case assumes that students have been exposed to WACC, CAPM, the DDM and the Earnings
Capitalization model.
