321.

315.2

  1. Let's say that Nike wants to market a new sports drink called "Swoosh!" Assume that the beta of Nike is 1.2, the beta of Gatorade sports drinks is 1.4, the expected return on the stock market is 12% and the risk-free return is 4%. What discount rate (opportunity cost of capital) should Nike use for Swoosh! and WHY? (2 pts)

Nike needs to estimate the risk of going into the sports drink business. Since Gatorade operates in the sports drink business, the risk of Gatorade is a good measure of the risk of that business. It is inappropriate to use the risk of Nike's current business since that is the risk of athletic footwear and apparel, not the risk of sports drinks. Once it has a good estimate of the risk of the sports drink business, it can use that estimate to compute the appropriate discount rate for that level of risk. We do that using the CAPM:

So they should use 15.2% as their discount rate.

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