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Nike Case

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Definition of WACC
The Weighted Average Cost of Capital (WACC) is the rate at which the firm is expected to pay for capital raised by issuing debt and equity to finance its assets. It is the minimum return that the company should earn to satisfy the needs of the debt holders and shareholders of the company. It is calculated by proportionally weighing each category of capital such as common stock, preferred stock, long term and short term debts, bonds etc. It is the discount rate used to calculate the present value of the future cash flows when the risk pertaining to that particular cash-generating unit is similar to that of the overall firm
WACC is calculated by multiplying the cost of each category of capital raised with its proportional weight in the capital structure and summing them all.
WACC CALCULATION:
WACC = Cost of Equity + Cost of Debt (after tax) Weighed by the proportion of debt and equity in the capital structure
Weighed by the proportion of debt and equity in the capital structure

Estimating the cost of Capital
1. Capital Budgeting decisions
It is important for a company to know whether a particular investment would be profitable in the long run. If the company knows the cost of capital it can accept or reject investment proposals by calculating the present values of the future cash flows. The company would most likely not invest if the cost of borrowing is greater then the returns generated from the investment.
2. Determining the ideal capital structure
By calculating the cost of capital, a firm can keep track of the market conditions and raise money at the lowest rates by employing the right mix of debt and equity in the capital structure of the company. By keeping lower cost of capital, the firm will be able to achieve higher earnings and market price of the share.
3. Performance measurement
Cost of capital can help determine the

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