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1. You are provided with a Harvard Case UVA-F-1353: Nike’s Cost of Capital.

(i) How did Joanna Cohen estimate Nike’s the weighted average cost of capital? Explain all the steps and assumption she made to estimate each component of Nike’s WACC.

(ii) What mistakes did Joanna Cohen make in her analysis? Identify the mistakes regarding the estimation of cost of debt, cost of equity and WACC.

(iii) What is the correct estimate of Nike’s WACC? Justify the methodology you use for estimating the cost of debt, the cost of equity, the weight of debt and equity and WACC.

2. A company has a target capital structure of 40% debt and 60% equity. It has a bond with face value of $1,000 that pays a 10% coupon rate semiannually, and matures in 20 years. The bond is currently selling for $849. The company has just paid a cash dividend of $2 per share, which is expected to increase at a growth of 8%. The company’s equity stock is currently selling for $27 per share, which has a beta of 1.2 and marginal tax rate is 40%. The rate of return on a risk-free asset is 10% and market risk premium is 5%.

(i) Calculate the company’s cost of debt and tax-adjusted cost of debt.

(ii) Determine the company’s cost of equity using the capital asset pricing model (CAPM)

(iii) Calculate the company’s cost of equity using the constant-growth dividend model

(iv) Determine the company’s weighted average cost of capital (WACC).