1. What is the WACC and why is it important to estimate a firms cost of capital? Do you agree with Joanna Cohens WACC calculation? Why or why not? 1.1 The definition of WACCWeighted average cost of capital(WACC), is a weighted-computational method of analyzing the cost of capital based on the whole capital structure of a firm. The result of WACC is the rate a firm use to monitor the application of the current assets because it represents the return the firm MUST get. For example this rate could be used as the discount rate of evaluating an investment, and maintaining the price of firms stock.1.2 Analysis of Johanna Cohens calculationWe analyzed the process of Johanna Cohens calculation, and found some flaws we believe caused computational mistakes.i. When using the WACC method, the book value of bond is available as the market value since bonds are not quite active in the market, but the book value of equity isnt. Instead of Johannas using equitys book value, we should multiply the current price of Nikes stock price by the numbers of shares outstanding.ii. When calculating the YTM of the firms bond, Johanna only used the interest expense of the year divided by the average debt balance, which fully ignored the discounted cash flow of the cost of debt.2. If you do not agree with Cohens analysis, calculate your own WACC for Nike and be prepared to justify your assumptions.Combining the analysis above, we now give our own WACC calculation as following:2.1 The value of debt(based on EXIHIBIT 3). Since the book value of debt may represent the market value, we merely need to sum up the values of Long-term debt, Notes payable, and the Current portion of long-term debt: 435.9+855.3+5.4=$1,296.6 m2.2 The cost of debt (based on EXIHIBIT 4):PV: -95.6FV: 100n: 40Pmt: 6.75/2= 3.375 (as itpays semiannually) So, we get the YTM is i*2=3.58*2=7.16%2.3 The value of equity (based on EXIHIBIT 1&4): Price of stock * numbers of shares outstanding= 42.09*273.3=$11,503.2m2.4 The cost of equity (based on EXIHIBIT 4): E(Ri) = Rf +【E(Rm) - Rf】* iBecause the government bond yield is 5.74%, Geometrical historical risk premium is 5.90%, and the average historical of Nike is 0.80, then we get:E(Ri)= 5.74%+5.90%* 0.8=10.46%2.5 Weights of each security (based on 2.1&2.3) Weight of debt=1,296.6/(1,296.6+11,503.2)=10.13% Weight of equity=11427.44/(1,296.6+11,503.2)=89.87%2.6 Cost of capital by WACC method (based above): Cost of capital = Weight of debt * Cost of debt * (1 Tax rate) + Weight of equity * Cost of equity = 10.13% * 7.16%* (1-0.38) + 89.87% * 10.46% = 9.85%3.Calculate the costs of equity using CAPM, the dividend discount model, and the earnings capitalization ratio. What are the advantages and disadvantages of each method?3.1 Calculating the costs of equity by CAPM, and its advantages & disadvantagesi. Calculation:According to 2.4, we have already got the result of CAPM, which is 10.46%. ii. Advantages First, because CAPM is a theory based on the whole market, it obviously includes the effects between the market as the integrity and each individual stock. Second, with the counterbalance among each stock in the entire market, CAPM only needs the consideration of systematic risk, which much simplifies the calculation. Third, CAPM also bypasses the specific values of future cash flow because the equation is actually the relation between systematic risk and return rate, which is also another simplification of calculating. Fourth, merely depending on the systematic risk, CAPM could offer the investors a reliable discounting rate to assess the value of a certain investment. iii. Disadvantages: First, involving the counterbalance among the entire market, CAPM acquiesces an effective, active and healthy market environment. Second, comparing the consideration of market risk, CAPM may omit the subtle risk differences among each single firm. Third, the crucial systematic risk, the beta coefficient, is obviously hard to calculate.3.2 Calculating the costs of equity by DDM, and its advantages & disadvantagesi. Calculation (based on EXIHIBIT 4): Based on the dividend discount model, P0 = D0 * (1+g) / (k g), then we get the return rate (the cost of equity) k = D0 * (1+g) / P0 + g = 0.48 * (1 + 0.055) / 42.09 + 0.055 = 6.7% ii. Advantages First, DDM fully considers the time value of consistent cash flow of an investment. Second, it is pretty easy to get the necessary historical data. Third DDM is flexible enough for the adjustment of any future situation. Fourth, once the growth pattern is confirmed, it is very straightforward to get the discount rate of assessing an investment. iii. Disadvantages First, without enough consideration of risk cost, DDM may underestimate the equity cost. Second, all of the data is based on historical record,