Cost of debt. Instead of dividing interest expenses by debt value, the more appropriate way to estimate the cost of debt is to find the yield from the market. Use the information given in Exhibit 4 and the RATE or YIELD function in Excel, we calculate the market yield to be 7.1%. Lets say that the market price of Nikes debt goes up due to higher demand from bond investors. Would the yield be more or less, and how would this affect the WACC? How would this affect the stock price per share?

240 1.0 Pag. EXHIBIT 4 | Capital Market and Financial Information On or Around July 5, 2001 Current Yields on U.S. Treasuries Nike Share Price Performance Relative to S&P500: 3-month 3.59% January 2000 to July 5, 2001 6-month 3.59% 1-year 3.59% 5-year 4.88% 10-year 5.39% 20-year 5.74% Nike 1.1 S&P 500. Historical Equity Risk Premiums (1926-1999) Geometric mean 5.90% WW Arithmetic mean 7.50% 0.9 Current Yield on Publicly Traded Nike Debt Coupon 0.8 6.75% paid semi-annually Issued 07/15/96 Maturity 07/15/21 0.7 Current Price $95.60 0.6 W Nike Historic Betas 1996 0.98 1997 0.84 1998 0.84 1999 0.63 2000 0.83 YTD 6/30/01 0.69 Nike share price on July 5, 2001:$ 42.09 Dividend History and Forecasts Average 0.80 Payment Dates 31-Mar 30-Jun 30-Sep 1997 0.10 0.10 0.10 Consensus EPS estimates: 1998 0.12 0.12 0.12 FY 2002 FY 2003 1999 0.12 0.12 0.12 $2.32 $2.67 2000 0.12 0.12 0.12 2001 0.12 0.12 0 04 Mar-00 May-00 Mar-01 Janos 00 00-des Nov.00 May-01 A01 31-Dec Total 0.10 0.12 0.12 0.12 0.40 0.48 0.48 0.48 Value Line Forecast of Dividend Growth from '98-'00 to '04-'06:5.50% *Data have been modified for teaching purposes. Sources of data: Bloomberg Financial Services, Ibbotson Associates Yearbook 1999, Value Line Investment Survey. IBES