The WACC of the Nike Inc Company Essay Example | Topics and Well Written Essays - 750 words

The WACC of the Nike Inc Company - Essay Example The cost of the debt is the effective rate paid by a company on its current debts. It is calculated based on the ratio between the amount of interest paid annually and the market value of the debt. It is used to ascertain the cost the company will incur in servicing the debts. The method used to calculate the cost includes the tax because interest is tax-deductible, thus, it will reduce the tax liability (Binsbergen & Graham 2010). The formula requires the use of the annual interest rate paid and the market value of the debt to estimate the cost of debt. Based on this, the figures are obtained from the income statement and the balance sheet respectively. The cost of retained earnings is the rate of return shareholders require on the firms common stock. The company should earn on its reserved earnings at least as much as its shareholders themselves could earn on other investments of equal risks (Pandey 2010). This method was chosen as the beta of risk could not be ascertained from the financial information. The method uses the expected dividend and the market value of the shares to arrive at the cost of retained earnings. The cost of common stock is the proportion of dividend paid to the shareholder as compensation for the money they have invested. It is calculated as the fraction of the amount paid to them in form of dividends in comparison to the value of the share in the market (Jones 2010). A student will be able to analyze the company and understand its return while a market analyst will be able to know the returns from the company and its viability as an investment opportunity. It shows the return of the money that was initially invested and what it cost the company in paying that dividend.