Scribd Logo
Upload

Welcome to Scribd!

  • 13 views

    Ans 2. Calculation Using Dividend Growth Model (DGM)

    Uploaded by

    Mohit Maheshwari
    The document discusses different models for calculating the cost of capital for Nike Inc.: 1) The dividend growth model was rejected because Nike does not pay substantial dividends. 2) The earnings capitalization model yielded a cost of capital of 5.51%. 3) The capital asset pricing model takes into account systematic risk and has more straightforward calculations compared to other models. It produced a cost of capital estimate of 9.81%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd

    Ans 2. Calculation Using Dividend Growth Model (DGM)

    Uploaded by

    Mohit Maheshwari
    13 views2 pages
    The document discusses different models for calculating the cost of capital for Nike Inc.: 1) The dividend growth model was rejected because Nike does not pay substantial dividends. 2) The earnings capitalization model yielded a cost of capital of 5.51%. 3) The capital asset pricing model takes into account systematic risk and has more straightforward calculations compared to other models. It produced a cost of capital estimate of 9.81%.

    Original Title

    cf

    Copyright

    © © All Rights Reserved

    Available Formats

    DOCX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    The document discusses different models for calculating the cost of capital for Nike Inc.: 1) The dividend growth model was rejected because Nike does not pay substantial dividends. 2) The earnings capitalization model yielded a cost of capital of 5.51%. 3) The capital asset pricing model takes into account systematic risk and has more straightforward calculations compared to other models. It produced a cost of capital estimate of 9.81%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    13 views2 pages

    Ans 2. Calculation Using Dividend Growth Model (DGM)

    Uploaded by

    Mohit Maheshwari
    The document discusses different models for calculating the cost of capital for Nike Inc.: 1) The dividend growth model was rejected because Nike does not pay substantial dividends. 2) The earnings capitalization model yielded a cost of capital of 5.51%. 3) The capital asset pricing model takes into account systematic risk and has more straightforward calculations compared to other models. It produced a cost of capital estimate of 9.81%.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 2

    Ans 2.

    Calculation using Dividend Growth Model (DGM)

    The assumption made with this model is that the company pays a substantial dividend, but Nike Inc.
    does not. Therefore, we rejected this model because it does not reflect the true cost of capital. The
    calculation is as follows

    DDM = [Do (1+g)/Po] + g = [0.48(1+.055)/42.09] + .055 = 6.70%

    Calculation using the Earnings Capitalization Model

    The final model used to compute the cost of capital was the earning capitalization model. The
    earnings capitalization model calculations were found this way

    ECM = E1/Po = 232/42.09 = 5.51%

    Systematic Risk: CAPM considers systematic risk (beta) in estimating the cost of equity, reflecting
    the stock's volatility relative to the market. This factor accounts for the inherent risk associated
    with investing in the overall market, making CAPM more comprehensive in assessing the required
    return on equity.

    Ease of Use: CAPM is relatively straightforward to apply compared to the DDM and ECM, which
    require specific company data like dividends, growth rates, and earnings. CAPM's reliance on
    market-based inputs simplifies the calculation process and makes it more accessible for investors
    and analysts.

    The CAPM takes into account systematic risk (beta), which is left out of other return models, such as
    the dividend discount model (DDM). Systematic or market risk is an important variable because it is
    unforeseen and, for that reason, often cannot be completely mitigated.

    Ans 3. To discount cash flows in Exhibit 2 with the calculated WACC of 9.27%, the present value
    equals $ 58.13 per share, which is more than the current market price of $42.09.

    So, the recommendation is to buy

    Ans 2. Our WACC Calculation

    For the market value of equity, $42.09 x 273.3 million shares = 11,503 Mn.

    Due to the lack of information on the market value of debt, the book value of debt, 1,296 Mn, is used
    to calculate weights.

    Thus, the market value weight for equity is 11,503 / (11,503+1,296) = 89.9%; the weight for debt is
    10.1%.

    Thus, our calculation of the WACC is as follows: 4.44%*0.101 + 9.81%*0.899 = 9.27%

    The market risk, beta

    I don't agree that Cohen uses the average beta from 1996 to July 2001, 0.80 to be the measure of
    systematic risk, because we need to find a beta that is most representative of future beta. As such,
    the most recent beta will be most relevant in this respect. So, I suggest using the most recent beta
    estimate, 0.69.

    Therefore, our estimate of the cost of equity will be: 5.74% + (5.9%) * 0.69 = 9.81%

    You might also like