1. First, read Case 13, “Best Practices in Estimating the Cost of Capital.
2. What is WACC and why is it important to estimate a firm’s cost of capital?
3. Do you agree with Joanna Cohen’s WACC? Why or why not?
4. If you do not agree with Joanna’s analysis (hint: she has one or more errors) calculate your own WACC for Nike and be ready to justify your assumptions and what she did wrong.
5. Calculate the costs of equity using CAPM. The dividend discount(Gordon) model, and the earnings capitalization model. What are the disadvantages and advantages of each? Can each be used here or is their a violation or theory or logic in one or more of them? 6. What should Kimi Ford recommend regarding the investment in Nike?(No fair using 20/20 hindsight)
7. The DCF valuation model Exhibit 2 is a minor portion of the case. Estimating their cost of capital is the “big” part. However, some sensitivity analysis would be good since there is a lot of room for error in estimating WACC.
1. How does Teletech currently use the hurdle rate?
2. Please estimate segment WACC’s for Teletech (See the worksheet in Case Exhibit 1. As you do this, make careful note of points of judgment in the calculation.
3. Interpret Rick Phillips’ graph (Figure 1). How does the choice of constant versus risk-adjusted hurdle rates impact the evolution of Teletech’s two segments. What are the implications for Teletech’s resource-allocation strategy?
4. Do you agree that “all money is green”? What are the implications of this view. What are the arguments in favor? Opposed?
5. Is Helen Bueno right that management would destroy value if all of the firm’s assets were redeployed to only the telecommunications business segment? Why or why not? Please prepare a numerical example to support your view.
6. Has Products and Systems destroyed value? What evidence or illustration can you give to support this opinion?
7. What should Teletech say in response to Victor Yossarian?
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