Cost of equity. We have explained in details how to apply the CAPM (Capital Asset Pricing Model) to estimate Nikes cost of equity. Another approach is actually to use the Dividend Growth Model that we also have covered in class: 0 = 0 (1+) () The r is actually the cost of equity. Use the information on dividend from Exhibit 4, can you back out the cost of equity?

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