GSM 5421: INVESTMENT ANALYSIS

LECTURER: DR CHEN CHAW MIN

INDIVIDUAL ASSIGNMENT: NIKE INC WACC

NAME
VIVEKSARATI A/L SANDRASIGARAN

MATRIC ID
PBS1311014

Value of equity

E
=

Stock Price

Number of Shares Outstanding

$42.09

273.3

$11,503.19

Market Value of Debt

D
=
Current LT
=

$5.40

$1,296.60

Notes Payable

LT Debt (discounted)

$855.30

$435.9

The cost of debt (based on EXHIBIT 4):

PV: -95.6
FV: 100
n: 40
Pmt: 6.75/2= 3.375 (as it pays semiannually)

So, we get the YTM is i*2=3.58*2=7.16%

The cost of equity (based on EXIHIBIT 4):

E(Ri) = Rf +E(Rm) - Rf* i

Government bond yield is 5.74%, Geometrical historical risk premium is 5.90%, and the average
historical of Nike is 0.80, then we get:
E(Ri)= 5.74%+5.90%* 0.8=10.46%

Weights of each security (based on 2.1&2.3)

Weight of debt=1,296.6/ (1,296.6+11,503.2) =10.13%

Weight of equity=11,427.44 (42.09 X 271.5) / (1,296.6+11,503.2) (42.09 X 273.3)=89.87%

Cost of capital by WACC method (based above):

Cost of capital = Weight of debt * Cost of debt * (1 Tax rate) + Weight of equity
* Cost of equity = 10.13% * 7.16%* (1-0.38) + 89.87% * 10.46% = 9.85%