Question

Over the last twenty years there has been considerable consolidation in the confectionary business​ (e.g., the acquisition of Rowntree PLC by Nestle SA in 1988 and Cadbury by Kraft in​ 2010). You have a suspicion that a large food manufacturer might try to buy Tootsie Roll. You want to calculate a DCF valuation for Tootsie Roll. The first step in your valuation is to calculate Tootsie​ Roll's weighted average cost of capital. Using the data provided​ below, answer the questions that follow and calculate Tootsie​ Roll's WACC. The​ risk-free rate is 4.25​%.The expected return on the market portfolio is 8.75​%.The corporate tax rate is 38​%.The face value of Tootsie​ Roll's outstanding bonds is 2,500 million.The coupon rate on Tootsie​ Roll's bonds is 5​%. Assume that the bonds pay annual coupons.The yield to maturity on Tootsie​ Roll's bonds is 7​%. Tootsie​ Roll's bonds mature in 9 years. Tootsie Roll has 1,700 million common shares outstanding.The market price of Tootsie​ Roll's common shares is ​$6.05 Tootsie​ Roll's Beta is 0.7.

a.  What is Tootsie​ Roll's after-tax cost of​ debt?

b.  What is Tootsie​ Roll's cost of​ equity?

c.  What is the market value of​ long-term debt?

d.  What is the capital structure weight for​ equity?

e.  What is Tootsie​ Roll's WACC?

Answer 1