What is your estimate of WACC? Show detailed calculation of cost of debt,cost of equity and debt/equity weights. State any necessary assumption andprovide your reasoning.

On June 28, 2001, Nike held an analysts’ meeting to disclose its fiscal-year 2001 results. The information is presented in Exhibit 1 and 3.1

Anna Ford, an analyst from UBS Warburg, showed her forecast that Nike is overvalued at its current share price of $42.09 if the discount rate is 12 percent (see
Exhibit 2). She had, however, done a quick sensitivity analysis that revealed Nike was undervalued at discount rates below 11.2 percent.

You are required to write a memo that estimates Nike’s cost of capital to assist Anna’s investment valuation. You can assume the effective tax rate is 38% for Nike (adding state tax of 3 percent to the US statutory tax rate). Nike debts financing includes long term debt, notes payable and current portion of long term debt. The book values of
Nike debts fairly approximate market values.

Question 1 What is your estimate of WACC? Show detailed calculation of cost of debt, cost of equity and debt/equity weights. State any necessary assumption and provide your reasoning.

Question 2 what do you recommend regarding an investment in Nike?

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