The YTM is a good estimate for the cost of debt if a company had issued debt in the past and the bonds are publicly traded just as in Nike's case. Our calculations for Nike's yield to maturity based on the given data showed that Kd= 7.16%.c1 (See Appendix for detailed calculations)
The second variable that should be noted is T or the tax rate. In her calculations, Joanna Cohen added the 3% state taxes to the 35% statutory tax where in WACC calculation the marginal rate should be used. The marginal tax rate generally refers to the "federal income tax that is levied onto the additional dollar earned" and usually is about 40%.
The weights of the costs, Wd and We, are very important in calculating WACC as they show the company's capital structure. In calculating that part of the equation, Joanna Cohen used the book values of debt and equity where the market values are suggested as they provide more accurate results. As book and market values of debt and equity may differ a lot, market values of debt and equity give a closer estimation of the capital structure2. We calculate the enterprise value (P0*#shares outstanding = $11,427.4357m). For debt, the book value gives a close estimation for the current value, whereas the same doesn't hold for the value of equity. Thus, debt is equal to $1,296.6m (current portion of L-T de View More »