Nike is a famous sport products company. Its mission is to do everything possible to expand human potential. It does that by creating groundbreaking sport innovations, by making its products more sustainably, by building a creative and diverse global team and by making a positive impact in communities where people live and work.

Nike is considering whether to change its all-equity capital structure to one that is financed by 50 percent debt. In the all-equity scenario, there are 5,000 outstanding shares and the price per share is $60. It is assumed that annual earnings before interest and tax (EBIT) of Nike maintains at $28,000 until forever. The interest rate on the debt is 8 percent. Nike is not required to pay corporate tax

Required:

(a) Assess the firm value and its equity value before and after levering.

(b) Estimate the costs of the firm and its equity before and after levering.

(c) Mary, a shareholder of the firm, owns 100 shares of Nike. Suppose Nike does change its capital structure, but Mary prefers the current all-equity capital structure. Explain how she can un-lever her portfolio to match the original capital structure. Assume that the firm has a dividend payout rate of 100 percent.

(d) Appraise three real-world characteristics of capital structure management.