This document discusses calculating the weighted average cost of capital (WACC) for Nike and Teletech Corporation using both the single rate and multiple rate methods. For Nike, it identifies mistakes in the case study's WACC calculation and provides corrections around using market values instead of book values, including redeemable preferred stock in debt, and updating the beta value used. It then recalculates Nike's WACC as 9.27%. For Teletech Corporation, it calculates the WACC as 9.30% using the single rate method and 9.20% using the multiple rate method weighted by Teletech's business segments. The multiple rate method provides a lower estimated cost of capital.

1. Nike, Inc.: Cost of Capital
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2. Mistakes From The Case Study
• 1. Methodology for Calculate the cost of Capital (WACC)
• Should use market value not book value
• 2. Cost of debt
• Add redeemable preferred stock (0.3)
• 3. Cost of equity
• CAPM – Change beta from average to latest beta. 0.8 and 0.69
respectively.

3. Market Value should considered
Exhibit 2
Market Value of Equity = Stock Price x No. of Share
Outstanding
From the Case
• Book Value of Equity = Stock Price x No. of Share Outstanding
Market Value of
= 37.27 x 271.5
Market Value of
= 10,118.81
Recalculate Market Value
• Market Value of Equity = 42.09 x 271.5
Market Value of Equity = 11,427.44

4. Find WACC
Exhibit 3
Total Amount of Debt = Current LT + Notes Payable + LT Debt
(discounted) + Redeemable Preferred stock
• Total Amount of Debt = 5.40 + 855.30 + 435.9 + 0.3 = 1,296.90
• Debt + Equity
= 1,296.90 + 11,427.44 = 12,724.34
• Weight of Debt
= Debt / Debt + Equity
Weight of Debt
= 1,296.90 / 12,724.34 = 0.102or 10%
• Weight of Equity
= Equity / Debt + Equity
• Weight of Debt
= 11,427.44 / 12,724.34 = 0.90 or 90%

5. Find Cost of Debt
Exhibit 1,4
Liabilities within 12 months
• Interest rate = Interest Payment / Operating Income
• Interest rate = 58.7 / 1014.2 = 0.058 or 5.8%
•
This interest rate is approximately equal to 20 year yields on U.S
Treasuries (Exhibit 4)
Long-Term Liabilities (Yield to Maturity)
• Nike’s bond issued on 1996, and will expire on 2021, thereby 20 years
• N = 40 , FV = -100 , PV = 95.60 , PMT = -3.375
• Compute I/Y = 3.58 %
• Annual I/Y = 3.58 x 2 = 7.16%
• After Tax Cost of Debt = I/Y (1 - Average Effective Tax) = 7.16% (1-0.38%)=4.44%
N = 40
( 20 years x 2 )
PMT = -3.375
( 6.75/2 )

6. Find Cost of Equity
Exhibit 1,4
Find Cost of Equity
From Bond with 20 years maturity, compound semi-annually with 6.75%
coupon rate.
• Ri = rf + ( rm – rf ) B = 5.74 + (5.90)(0.69) = 9.81%
Rpm : Risk Premium
This interest rate is approximately equal to 20 year yields on U.S
Treasuries (Exhibit 4)
Rf = 5.74
From 20 years current yield
on U.S Treasuries
Rpm = 5.90
From Geometric Mean
B = 0.80
From Average history Bata

7. Find WACC
Exhibit 2
WACC = [Kd(1-t) x D/(D+E)] + [Ke x E/(D+E)]
WACC = [Cost of debt x Weight of Debt] + [Cost of equity x Weight of Equity]
WACC = 4.44% x 10% + 9.81% x 90%
= 9.27%
• To use market weights to estimate WACC will cause show how much the
firm to raise capital today. Cost should approximated by market value of
capital, not by the book value of capital.

8. Teletech Corp, 2005

9. Teletech Corporation
(By single rate)
Cost of Equity(Kequity,teletech)
= Rf + β*RPM
= Rf +β*(Rm - Rf)
= 4.62% + (1.15*(10.12%-4.62%))
= 4.62% + (1.15*5.5%)
Rf : U.S.Treasury Securities 30-year
β : Beta of Teletech Corporation
Rm : Risk Market Rate
Weightdebt,teletech : Weight of debt in Teletech
Kdebt,tele : After-tax cost of debt
Weightequity,tele
: 100 %- Weight of debt in Teletech
= 100%-22.2% = 77.8%
Kequity,tele : Cost of equity
= 10.95%
WACC Teletech Corporation
= [(Weightdebt,teletech* Kdebt,teletech)] + [(Weightequity,teletech* Kequity,teletech)]
= [(22.2%*3.53%)] + [(77.8%*10.95%)]
= 0.007837 + 0.085191 = 0.0930*100
= 9.30%

10. Telecommunications service Industry
• Cost of Equity(Kequity,telecom)
= Rf
+ β*RPM
= Rf +β*(Rm - Rf)
= 4.62% + (1.04 *(10.12%-4.62%))
= 4.62% + (1.04*5.5%)
= 10.34%
Rf : U.S.Treasury Securities 30-year
β : Average beta of Telecommunications Service
Industry
Rm : Risk Market Rate
Weightdebt,telecom : Market value Debt/Capital
Kdebt,tele : After-tax cost of debt
Weightequity,telecom :
100 %- market value Debt/Capital
= 100%-27.1% =72.9%
Kequity,tele : Cost of equity
WACC Telecommunications service Industry
= (Weightdebt,telecom* Kdebt,telecom) + (Weightequity,telecom* Kequity,telecom)
= (27.1%*3.44%)+(72.9%*10.34%)
= 0.009322 + 0.0753786 = 0.084701
= 8.47%

11. Product & System
FIND WACC :
Cost of Equity PS = Rf +MRP*β
= Rf +(Rm-Rf)*β
= 4.62% + 5.5%*1.36 = 12.1%
Cost of Debt PS (After-tax cost of debt) = 4.48%
Average of Weight of Equity = 100% - Market Value Debt/Capital
= 100 – 9.20 = 90.80 %
Average of Weight of debt = (13.1%+ 5.3%)/ 2 = 9.20%
WACC PS
= {Weight Debt,(p+s)*K debt,(p+s)} + {Weight Equity,(p+s)*K Equity,(p+s)}
= 9.20% * 4.48% + 90.80% * 12.10%
= 11.4%
Rf
: Risk-free rate
= 4.62%
(the yield on 30-years U.S
Treasuries)
Rm
: Market risk rate
=10.12%
MRP
: Market-risk premium
= Rm-Rf
= 10.12% - 4.62
= 5.50%
Average of Beta
= (1.39+ 1.33)/ 2
= 1.36

12. Teletech Corporation,2005
(By Multiple-rate)
WACC of Teletech Corporation
WACC Telecom = 8.47 %
WACC P&S= 11.4 %
WACC Teletech = WACC Telecom + WACC P&S
= (8.47 % * 75 %) + (11.4 % * 25 %)
= 9.20 %
Conclusion
WACC
8.47% <
9.2%
< 11.4%
Telecom < Teletech Corporate < P&S
• From the result, products and systems segment has the highest WACC
• A high WACC indicates that a company is spending a comparatively large amount of
money in order to raise capital, which means that the company may be risky.
• The multiple-rate method would give lower cost (9.20% )than the single-rate method
(9.30% ) which give higher return to shareholders better than a single rate method.