Capital Asset Pricing Model

Use the following information for Nike, Inc, and define the cost of equity using the Capital Asset Pricing Model.

After tax interest cost =                                                          6.0%

Beta =                                                                                      1.2

Beginning Book Value of Equity =                                        $15 billion

Current stock price =                                                              $106 per share

Dividends (current year) =                                                      $1.48 per share per year

Dividend growth rate =                                                           5%

Earnings per Share =                                                              $3.24/share

Equity Rist Premium =                                                           7.5%

Market Cap =                                                                          $164.3 billion

Net Debt to Capital =                                                              20%

NOPAT Margin =                                                                   8%                  

Risk Free Rate =                                                                     4.4%

Sales / Beginning Long-term assets =                                    20

Sales / Beginning Net Operating Working Capital =             10

1a. Compute Nike’s cost of equity, using the Capital Asset Pricing Model.  Show your computations. (5 points)

Nike’s Cost of Equity:

Computations:

1b. If Nike pays dividends at the end of each year, compute the value of one share of Nike stock using the discounted dividend approach.  Show your computations (5 points)

Nike’s value per share:

Computations:

1c. Briefly (one sentence should suffice) why the dividend discount model is rarely used for valuation – that is, what is the biggest problem with this approach.  While being brief, be as specific as possible.  (5 points)