NIke solutions Essay

1686 Words Feb 28th, 2015 7 Pages
Appendix I

C1: Equity = Stock Price x Number of Shares Outstanding
= $42.09 X 271.5
= $11,427.435 million
C2: Using Adjusted Beta formula:
Adjusted Beta = 0.67* historical Beta + 0.33 = 0.67* 0.69 +0.33=0.79
C3: Using CAPM formula:
KE = Krf + ß (Km-Krf) = 3.59%+0.79*6.7%=8.89%
C4: Using rearranged DGM formula:
KE =D1/P0 +g= 0.48(1+5.5%)/42.09 +5.5%=6.7%
C5: Using redeemable bond formula:
KD: 95.6= 100/ (1+KD/2)40 + 3.375(1-0.38)/(1+KD/2)n
KD=4.52%
C6: Using WACC formula:
Rwacc =4.52*10.19% + 8.89*89.81% = 8.44%
C7: average dividend growth rate: g = [0+12.5++ 20+12+8]/4 %=8%
(Assumption: In this calculation, the growth rates significantly higher than 20% and negative figure have been ignored.)
C8: Using CAPM:
…show more content…
However, like many other models, CAPM inevitable limitations and criticism (Vintila, 2006). Maybe the attraction of CAPM is simplicity and easy to apply, but may be CAPM too simple to apply, it lead to reflect not really true happen, its normally just a model (Fama & French, 2003). There is only limited discussion highlights some of the CAPM model. These abnormalities include:
The effect of firm size – it was discovered that the firm’s shares have small market value (market capitalization = price per share x number of share) might get higher profitability of the firm’s stock value market, if other factors the same (William, 1983). Effect of PE and MB ratios – it was found that the stocks of companies with PE ratios (price/earning ratio) and the ratio of MB (market-to-book value ratio) might get higher profitability shares of companies with PE ratios and high MB.
January Effect – Those who hold share for the period from December to January usually have higher margins than other months. However, it was also noted that although the ‘January Effect’ was found in January in many years but not always occur (Thaler, 1987).
Criticism from researchers ‘Multifactor model’: proponents of ‘Multifactor Model’ that CAPM is useful though for purposes of corporate finance but it does not provide the precise measurement of the expected return of a particular stock. ‘Multifactor Model’ for stock that profits fluctuate depending

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