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24 views

Question 1

NA

Uploaded by

Tanya
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
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Question 1

When calculating the cost of debt Joanna Cohen divided the interest expense by the average balance of
interest. The cost of debt should include the current market yield on Nike’s publicly traded debt.

N=2(25-5) = 40 (paid semiannually) Cost of debt = 7.16% (1-38%)

PV=95.60 = 4.44%

FV=100

Coupon rate= 6.75/2= 3.375

7/15/96 – 7/15/21 = 25-year bond

*2001 was issued 5 years ago.

Question 2

The capital asset pricing model (CAPM) is the only method that can be used to estimate the cost of
equity. If the DDM model is used it will not reflect the true cost of capital.

KE= Rf + Beta (Rf – Rm)

= 5.74% + 0.69(5.90%)

= 9.81%

Question 3

WACC = Kd(1-t) * D/ (D+E) + Ke *E /(D+E)

= 10.1% *4.44% + 89.9% * 9.81%

= 0.45% + 8.82%

= 9.27%

Joanna Cohen mistakes in her analysis was using the historical data in estimating the cost of debt, and
using book value to derive the weights to be used in debt & equity calculations.

Question 4

Question 5

*A

Question 6

A. No for both statements


*A stock dividend will decrease the price per share, all other things being equal. A stock split will
reduce the price and earnings per share proportionately, leaving the price to earnings ratio the
same.
Question 7

C.

Question 8

A. Decrease WACC Increase WACC

Question 9

Before After Stock Dividend


(20%)
Shares Outstanding 1,000,000 1,200,000

Stock Price $20.00

Total Market Value

Earnings $1,000,000.00 $1,000,000.00

EPS

Dividends per share $0.60

Dividends yield

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