There Are Two Types of Interest Rate for Nike
There are two types of interest rate for Nike, Inc. as follows:
1) For Notes payable, Current portion of long – term debt and Redeemable preferred stock, all these debts should be cleared during the period of maximum 12 months. Therefore, I calculated the interest rate in accordance with Exhibit 1(Income Statement) for 2001 year as follows:
Interest rate = Interest payment / Operating income
Cost of Debt = Interest rate = (58.7 / 1014.2) * 100 = 5.78%
You can see this interest rate is approximately equal to 20 year yields on U.S Treasuries
(Exhibit 4).
2) For Long – term debt, Nike, Inc. had issued the Bonds in which the Cost of debt was calculated by finding the yield to maturity on 20-year Nike Inc. debt with a 6.75% coupon semi-annually. I assumed Nike Inc. to have a single cost of capital since its multiple business segments (shoes, apparel, sports equipment, etc.) are not very different and would experience similar risks and betas.
Before-Tax Cost of Debt
I used three (3) methods as follows:
-Method (1): Using Cost Quotations Based on Coupon Interest Rate and Yield to Maturity (YTM)
Cost of Debt = 14.14%
-Method (2): Based on calculating the IRR
Cost of Debt = 14.15%
-Method (3): Approximating the Cost Based on the Value Bond and Coupon Rate
Cost of Debt = 14%
All of the calculations have been included in my spreadsheet.
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