Jun 21st, 2015
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American University of Puerto Rico
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1. WACC is the average cost of financing a companys assets, either through debt or equity. A firm's WACC is the overall required return on the firm as a whole. It is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm.2. We agree with I., choosing a single cost of capital. She made a cogent argument and we think the analysis would be much more complex otherwise. We arent trying to evaluate a project in a specific department but instead value the companys shares. We just need a single cost of capital.We agree with II. The figures are from the most current year and debt comes from current portion of long-term debt, notes payable, and long-term debt.We disagree with III. We care about debt that Nike will have to pay in the future, not in the past. The correct way to calculate debt is to look at Nikes bonds. Currently, Nikes bonds trade for $95.60 with a semiannual 6.75% coupon and mature in almost exactly 20 years. This yields an annual rate of 7.17%, as opposed to 4.3%. We can still use a 38% federal + state tax rate, and thus our final cost of debt is 4.45%.Similarly, using the book value of equity to calculate the equity/debt mix would be incorrect, because the book value is backwards looking, whereas market value takes into account todays opportunity cost of issuing equity. Thus we used current share price multiplied by the number of shares outstanding to calculate equity outstanding.We disagre

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