1) a. Kimi Ford is a portfolio manager at NorthPoint Group. She oversees the management of other people’s money while investing their cash into a well diversified portfolio. b. Johanna Cohen, is the assistant to Kimi Ford at NPG and helps gather data Ford needs to invest in her portfolios. c. North Point Group is a mutual-fund-management firm. NPG is a large cap fund and heavily invests in Fortune 500 companies. That is significant because a large cap fund deals with more money. Large cap also known as big cap signifies only those stocks that are worth more than 10 billion. Much capital must go into these stocks. d. Nike plans to boost revenue by developing more mid-priced segment of Nike shoes. While pushing the athletic apparel line. Nike will focus on expense control and have forecasted a growth of 8-10%.

2) a. The WACC (weighted average cost of capital) must be calculated because investors do not just invest in a firm’s common stock, they invest in more than one capital. That is why the WACC was created. Different types of capital also mean a different type of risk in a firm. The component cost is calculated for each different capital and the required rate of return. Overall, the WACC is used to find and calculate the cost of capital used to analyze capital budgeting decisions. b. The WACC is set by the investors (or markets) because investors and the portfolios they create measure the investment quality in a firm. The WACC can be different from another’s investor depending on the type of data they decide to use. c. No, it is not possible to calculate the exact WACC because it is a forecast and different investor’s use different numbers to calculate. It also depends on how optimistic your investor is. The investor can decide to use the minimum Rrf or the maximum Rrf. d. Johanna was incorrect because she decided to use historical data to forecast the WACC. Cohen should have used a single cost over the multiple costs because it is more efficient to analyze the data of the entire firm.

3) CAMP:
Because we are estimating the future cost of capital, so the beta we should use is the most recent beta, 0.69. The risk free rate of 5.74 is based on the 20 years U.S. Treasuries. Risk premium is based on the geometric mean –5.9%. Rs = Rf + Beta*Risk Premium = 5.74% + 0.69*(5.9%) = 9.81%
The result is reasonable because we are using the most recent data to estimate the future cost of equity.

4) To find another cost of equity we used the Discounted Cash Flow Approach. To find the cost of equity using the Discounted Cash Flow approach we used the equation rs = (D1/P0) + growth rate. To find D1 we needed historical data of pass dividends. For the year 2001 the dividend was $0.48. To see what the expected dividend (D1) would be we calculated last dividend multiplied by 1 and the growth rate (0.48*1.09). The growth rate of Nike is expected to be anywhere from 8-10%. We decided to use the mid-range of 9%. We have now configured all the data needed to compute to cost of equity using the Discounted Cash Flow Approach.

Rs = (D1/PO) + g, (0.5232/42.09) + .09 = 10.24%

This value is reasonable because it is still within +/-1% of the CAPM’s 9.81% expected return of common stock.

5) The discount cash flow method is the uses of future cash flows and is a more flexible ratio than because it evaluates the company and the possibility of growth, which makes the DCF less reliable. The CAPM model is based of an economic model for valuing stocks, bonds and other assets that relate to the bearing-risk and expected return. The CAPM divides the systematic risk and the specific risk into separate categories. Most investors prefer the CAPM