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Nike Inc Cost of Capital

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NIKE, INC.: COST OF CAPITAL

The cost of capital represents the minimum return required by providers of finance for investing in an asset, it may be a project, a business or strategic unit or an entire company. It needs to represent the capital structure used to finance the investment and therefore likely to include cost of equity and debt.

The cost of capital also represents a “hurdle rate” that a company’s projects must exceed in order to increase shareholders wealth and is used as a discount rate in net present value (NPV) investment appraisal techniques. Projects that generate a positive NPV at the cost of capital are accepted since they earn more than the investors required rate of return. Projects which generate a negative NPV are rejected as they earn less than their target rate of return. The cost of capital therefore plays a vital role in corporate finance, establishing a link between investment decisions and finance decisions i.e what companies should be spending their money on and how this should be funded.

The weighted average cost of capital (WACC) represents the overall cost of capital for a firm, incorporating the cost of debt, equity and preference share capital, weighted according to the proportion of each source of finance within the business. In arriving at the WACC for a firm, the models used to calculate the cost of each source of finance assume that the required rate of return is a function of the shareholders’ expectations of future cash flow returns, expressed as a percentage of the current value of their

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