A) Cost of Equity Calculation:
= Risk free rate+ Beta(market risk premium)
= 2.24+0.57(6.2)
= 5.78%
Calculative Notes:
a) Risk Free Rate:
30-year US treasury rate: 2.24%
b) Equity Risk Premium:
Duff and phelps equity risk premium: 6.2%
c) Beta: 0.57
B) Cost of Debt: 2.72%
For the purpose of calculation of cost of debt, we have assumed average of yield to maturity of existing bonds of the company.
c) Equity and Debt Weights:
D) Cost of Capital-On Book Value basis
E) Cost of Capital-On Market Value basis
Important to note, cost of capital based on market value is the most appropriate as it represents the appropriate risk involved within the company’s capital structure.
G) Equity and Asset Beta
Beta (asset) = Beta (equity) / [1+ [(1-t)*D/E]]
The above table indicates that amongst all of the three companies, Nike Inc. operates with least operating risk and also operates with minimal debt.
Appendix for Section G:
Beta for Nike
D/E for Nike
Beta for Adidas: 1.18
D/E for Adidas: 0.26
Beta for UnderArmour: 0.19
D/E for Under Armour: 0.38
References
Adidas. n.d. 2 August 2016 <http://www.morningstar.com/stocks/PINX/ADDYY/quote.html>.
Bonds. 2016. 2 August 2016 <http://www.morningstar.com/bonds.html>.
Nike. n.d. 2 August 2016 <http://www.morningstar.com/stocks/XNYS/NKE/quote.html>.
Under Armour. n.d. 2 August 2016 <http://www.morningstar.com/stocks/XNYS/UA/quote.html>.
