Calculating the Weighted Average Cost of Capital

• Go to Yahoo Finance (http://finance.yahoo.com) and capture the income statement information for the company you selected (Nike). (Be sure that your company has debt on their balance sheet. This will be required in your project.)
  • Enter your company?s name or ticker symbol. Your company?s information should appear.
  • Click on the Financials tab, and select the income statement option. Three years? worth of income statements should appear. Copy and paste this data into a spreadsheet.
  • Repeat step b. above for the balance sheets of the company.
  • Click on ?Historical Prices.? Capture the closing price of the stock as of the balance sheet date for the three fiscal years used in steps b and c above.
• Calculate the Weighted Average Cost of Capital (WACC) for the company:
  • Cost of Debt
  • Determine the market value of the firm?s debt issues. Be sure to review the firm?s 10-K. Also, the website http://finra-markets.morningstar.com/BondCenter may be of assistance.
  • You will need to calculate the firm?s composite YTM on its bonds. This can be achieved by calculating a weighted-average YTM for its bond issues.
  • After calculating the YTM for the bond issues, calculate the firm?s after-tax cost of debt. If the firm?s marginal tax rate cannot be identified in its 10-K, assume that the tax rate will be 35%.
  • Cost of Equity
  • Calculate the firm?s cost of equity using the capital asset pricing model (CAPM). The formula for the CAPM is r_i = r_f + ?_i (R_Mkt - r_f).
  • Assume the risk-free rate (r_f) is the current rate of 10-year U.S. Treasury Bonds.
  • Calculate the market rate (R_Mkt) by calculating the market return on the Standard & Poor?s 500 for the past 2 calendar years.
  • The beta for the firm can be obtained from Yahoo! Finance.

• Calculate the WACC
  • Determine the market capitalization of the firm?s common equity and preferred equity, if any.
  • Determine the firm?s capital structure based on the market value of the firm?s equity and debt. The market value of the firm?s debt can be obtained from the Morningstar website, listed in the Cost of Debt section above.
  • Calculate the WACC. As you recall, the formula for WACC is r_WACC = E (E + D) r_E + D (E + D) r_D(1 - T_C).

Deliverable

Prepare a narrated PowerPoint presentation using VoiceThread or WebEx that shows the steps you performed to calculate the WACC for your firm. Feel free to embed your Excel spreadsheets in the presentation to demonstrate your calculations. Be sure to discuss how the values were obtained or derived to arrive at your WACC result. Finally, be sure to discuss any strengths or limitations in the calculations you performed, and discuss your analysis about the overall validity of your results. Both members of the team must be part of the narration in the presentation.

I have attached my original pp presentation and the assignment requirements for reference.

Financial Statement Analysis By: Sharaye Baugh & John White Nike Inc. is a consumer producing products company that engages in developing, marketing, and designing of footwear apparel, and equipment worldwide. Nike is mainly known for designing casual, leisure, and athletic footwear for women, men, and children. We have identified several operational and market characteristics of the company and their profile. Nike Inc. has accomplished improvement market shares inside the market segment which is approximately 51.88% in comparison to Nike Industry peers market segment that is approximately at 48.12%. The presentation will give a brief comparative statement analysis of the company against some of its competitors. Comparable Group Companies The athletic footwear, apparel, and equipment industry is becoming highly competitive. The product characteristics between Nike and its competitors is a differentiation with their products. Nike being the largest athletic footwear industry because of the quality, reliability, consumer value/price, and performance of their products. Also, Nike's branding image creation is strong compared to their competitors. The four comparable group companies of Nike we used are Adidas, Under Armour, Deckers Outdoor Corp and Carter's Inc. The selection of these four group companies is based on revenue, the profitability, and market capitalization. However, the biggest competitors of Nike are Adidas and Under Armour. Extraction Strategy, Process & Methodology The data extraction strategy we used included collecting secondary data from various sources. Some of the secondary sources were Yahoo Finance & Lexis Nexis websites. Through the secondary sources the we were able to analyze the information provided regarding the financials of the four comparable group companies. We then used that collected information on the financial ratios of each of the comparable group company to calculate the industry averages and thus compared them to Nike. Ratios Utilized The first ratios utilized in this financial analysis include the net margin ratio, the return on equity ratio and the return on invested capital ratio. These profitability ratios are good indicators of how well a company is utilizing the resources to generate profits. The current ratio, quick ratio and the cash ratio were utilized since they are very important in gauging whether a company can be able to meet the short term obligations as they fall due. Some other ratios utilized include the total debt to equity ratio, the debt to asset ratio and the longterm debt to equity ratio. These ratios were utilized because they help to indicate whether a firm is able to manage debts appropriately and tell whether a firm may become insolvent. Ratios Deckers Outdoor Corp. Carter's Inc. Industry Average Nike Ratios Adidas Under Armour Current ratio 1.40% 3.13% 3.29% 4.31% 3.03% 3.62% Quick ratio Cash ratio 0.82% 0.31% 1.49% 0.27% 2.04% 1.03% 2.52% 1.45% 1.72% 0.77% 2.59% 1.84% Operating margin ratio Net margin 7.69% 5.28% 9.19% 4.27% 8.19% 6.19% 13.00% 8.00% 9.52% 5.94% 13.37% 11.61% Return on assets 7.28% 5.96% 7.22% 12.31% 8.19% 17.49% Return on equity 16.74% 11.59% 12.47% 29.84% 17.66% 30.22% Return on capital invested 12.89% 7.37% 9.54% 18.58% 12.10% 24.73% Total debt to equity ratio Long-term debt to equity 32.44% 25.93% 40.10% 37.58% 10.35% 3.37% 12.12% 5.52% 20.75% 16.73% 16.76% 16.40% Total debt to assets 13.78% 23.32% 7.83% 9.61% 11.26% 9.48% Analysis From the industry averages its clear that Nike is performing much better than the industry averages. First the liquidity ratios demonstrates that the company has the a better liquidity than the average in the industry. This is due to the industry averages of the current, quick, and cash ratios being 3.03%, 1.72% and 0.77% respectively while Nike's current, cash and quick ratios are 3.62%, 2.59% and1.84%. From the profitability ratios its clear that Nike is preforming better than the industry averages. The average industry operating margin ratio is at 9.52% while the operating margin ratio for Nike is at 13.37%. The net margin industry ratio average is at 5.94% while Nike's net margin of 11.61%. Nike has also been able to utilize and manage its assets to produce higher returns than industry averages. Analysis Nike has also been able to utilize and manage its assets to produce higher returns than industry averages. The returns on equity for the industry average is 17.66% while Nike's 30.22%. Also the return on capital invested of Nike is 24.79% which is higher than the industry average of 12.10%. The debt analysis still shows that Nike have managed its debts better than the competitors as Nike has lower debt levels. The industry averages for the total debt to equity, long-term debt to equity and total debt to assets ratios are 20.75%, 16.73% and 11.26% . Whereas Nike ratios are 16.76%, 16.4% and 9.48%. Value Creation This chart shows Nike (NKE)Value Creation and its Industry peers potential earnings that are closest in comparison. Currently, Under Armour (UAA) has become one of Nike's toughest price earning competitors. (Bell, 2016) Conclusion Nike Inc. is performing much better than the comparable group companies in the industry. It is not, therefore, possible to benchmark the company's performance with any of its competitors or even with the industry averages. Benchmarking can only be made against higher preforming institutions. Nike has to ensure that it make its own targets to ensure that it continues to grow. References Bell, S. (2016, Dec. 27). Comparing Nike's Current Valuations to Its Earning Potential. Market Realist. Retrieved from http://marketrealist.com/2016/12/comparing-nikes-current-valuat ions-to-its-earnings-potential/ Footwear in the US. (n.d.). Retrieved January 13, 2017, from http://www.euromonitor.com/footwear-in-the-us/report Parker, M. (2016, Jul. 21). NIKE, INC. ANNUAL REPORT ON FORM 10-K. NIKE, INC. Retrieved January 13, 2017, from https:// www.sec.gov/Archives/edgar/data/320187/0000320187160003 36ke-5312016x10k.htm Symbol Lookup. (n.d.). Retrieved January 13, 2017, from http:// www.marketwatch.com/investing/stock/aaplxf/financials Yahoo Finance (2017, Jan.). YAHOO FINANCE. Retrieved from https://finance.yahoo.com/quoteke?ltr=1 GSCM588 Article Summary Requirements General To write a summary, use your own words to express the main ideas and relevant details of the article you have read. Your purpose in writing the summary is to give the basic ideas of the original article. What was it about and what were the key points? In this assignment, it will also include a reflection and critique. Article Selection 1. Select a specific article of interest to you on the topic of a quality management-related subject. Examples may be how a given quality related problem was approached or solved at a company, or how a method of quality improvement was used in a certain situation. You might want to review the text, lectures, and/or documents in doc sharing for ideas that interest you. 2. The article needs to be a scholarly, peer-reviewed article, which you can find by using EBSCOhost. 3. You also need to identify which of the course TCOs and specific topics in the Syllabus are related to the article you select. Paper Format 1. All papers should be single sided, double spaced, and written in12-point Times New Roman font. 2. The paper should be between 3 and 5 pages, excluding the cover page, reference pages, and appendices. 3. The first page should include the title of the work; the student's name, address, telephone number, and email address; the course number; the date; and the instructor's name. 4. Follow APA style for general format and citations. 5. Paper sections must adhere to the guidelines below and each section must be labeled in the text. 6. The language should be clear, concise, and precise. 7. The tone should be professional, consistent, and not filled with jargon. 8. Grammar and syntax (sentence structure) must be correct. 9. The report must be free of misspellings and typos. Tables and Figures (if used) 1. All figures and tables must be referred to in your text before they appear on the page. a. 2. Figures and tables should appear on the same page that refers to them, or on the next page. All figures and tables need captions. Captions go below figures and above tables. Quotations and Citations 1. Quotations and citations are crucial components of a research paper. 2. Failure to properly cite research sources and borrowed ideas is plagiarism. 3. Papers submitted without citations and references will be returned to the student with no grade. 4. Refer to APA style guide for assistance with properly citing quoted and/or borrowed materials and ideas. Your paper must include the following sections. SECTION POINTS DESCRIPTION Title Page 5 This should include the title of your quality management research paper; your name, address, e-mail address, and telephone number; the course number and title; the instructor's name; and the date. Introduction 15 Provide an overview of the article and why you selected it to review and summarize. Key Points 35 Reflection 35 References and APA Format 10 Identify and clearly state the key points of the article and the quality management issue(s) to which they pertain. In this section, you are to reflect on your learning from this assignment. Identify the areas that you found most interesting and also identify areas that you feel will assist you most in your career. In addition, provide a critique if applicable. Although it is recognized that there may be a limited number of references if any other than the article being reviewed, all references must be cited in two places: within the body of your paper and on a separate reference list. Choose references judiciously and cite them accurately. Cite all sources using APA format. To use the ideas or words of another person without crediting the source is plagiarism. Plagiarism in its purest form involves copying passages either verbatim or nearly verbatim, with no direct acknowledgment of the source. The most common form of plagiarism is to paraphrase information from your source material. Paraphrasing does not relieve you of the obligation to provide proper identification of source data. The best way to avoid plagiarism is to make sure all quotes, ideas, or conclusions not your own are given proper acknowledgment in your text. A key thought to remember is \"If you did not write it, cite it!\" Also, all other aspects of the paper should conform to APA rules. Total 100 FIN515: Week 6 Project - Calculating the Weighted Average Cost of Capital Once again, your team is the key financial management team for your company. The company's CEO is now looking to expand its operations by investing in new property, plant, and equipment. In order to effectively evaluate the project's effectiveness, you have been asked to determine the firm's weighted average cost of capital. To determine the cost of capital, here is what you have been asked to do. 1. Go to Yahoo Finance (http://finance.yahoo.com) and capture the income statement information for the company you selected. (Be sure that your company has debt on their balance sheet. This will be required in your project.) a. Enter your company's name or ticker symbol. Your company's information should appear. b. Click on the Financials tab, and select the income statement option. Three years' worth of income statements should appear. Copy and paste this data into a spreadsheet. c. Repeat step b. above for the balance sheets of the company. d. Click on \"Historical Prices.\" Capture the closing price of the stock as of the balance sheet date for the three fiscal years used in steps b and c above. 2. Calculate the Weighted Average Cost of Capital (WACC) for the company: a. Cost of Debt i. Determine the market value of the firm's debt issues. Be sure to review the firm's 10-K. Also, the website http://finra-markets.morningstar.com/BondCenter may be of assistance. ii. You will need to calculate the firm's composite YTM on its bonds. This can be achieved by calculating a weighted-average YTM for its bond issues. iii. After calculating the YTM for the bond issues, calculate the firm's after-tax cost of debt. If the firm's marginal tax rate cannot be identified in its 10-K, assume that the tax rate will be 35%. b. Cost of Equity i. Calculate the firm's cost of equity using the capital asset pricing model (CAPM). The formula for the CAPM is ri = rf + i (RMkt - rf). ii. Assume the risk-free rate (rf) is the current rate of 10-year U.S. Treasury Bonds. iii. Calculate the market rate (RMkt) by calculating the market return on the Standard & Poor's 500 for the past 2 calendar years. iv. The beta for the firm can be obtained from Yahoo! Finance. Deliverable c. Calculate the WACC i. Determine the market capitalization of the firm's common equity and preferred equity, if any. ii. Determine the firm's capital structure based on the market value of the firm's equity and debt. The market value of the firm's debt can be obtained from the Morningstar website, listed in the Cost of Debt section above. iii. Calculate the WACC. As you recall, the formula for WACC is rWACC = E (E + D) rE + D (E + D) rD (1 - TC). 1 FIN515: Week 6 Project - Calculating the Weighted Average Cost of Capital Prepare a narrated PowerPoint presentation using VoiceThread or WebEx that shows the steps you performed to calculate the WACC for your firm. Feel free to embed your Excel spreadsheets in the presentation to demonstrate your calculations. Be sure to discuss how the values were obtained or derived to arrive at your WACC result. Finally, be sure to discuss any strengths or limitations in the calculations you performed, and discuss your analysis about the overall validity of your results. Both members of the team must be part of the narration in the presentation. Grading Rubric Possible Points Calculation of Cost of Debt Calculation of Cost of Equity WACC Calculation 12 12 8 Form 8 Criteria and Point Range 0-3 4-6 Incorrect data or no debt data provided. Questionable data used. Some errors in calculations presented. Data is mostly accurate. Correct calculations performed. Accurate debt data collected and correct cost of debt calculations made. 4-6 Questionable data used. Some errors in calculations presented. 7-9 Data is mostly accurate. Correct calculations performed. 10-12 Accurate equity data collected and correct cost of debt calculations made. 3-4 Two errors noted in the calculation relating to either cost of debt, cost of equity, or capital structure. 3-4 Several problems noted in regard to writing and presentation skills. 5-6 One error noted in the calculation relating to either cost of debt, cost of equity, or capital structure. 5-6 Writing and presentation done well with a few minor errors 7-8 WACC Calculation utilizes appropriate cost of debt and equity and capital structure to arrive at a solid result. 7-8 Virtually no errors in writing or presentation. Incorrect cost of debt calculations 0-3 Incorrect data or no equity data provided. Incorrect cost of equity calculations 0-2 All elements of the WACC calculation are incorrect, or calculation not performed. 0-2 Poor writing and presentation skills, or no presentation provided. 2 7-9 10-12 FIN515: Week 6 Project - Calculating the Weighted Average Cost of Capital 3