Question

1. As of today, McCormick's market capitalization (E) is $14,237,510,000. Market value of equity (E), also known as market cap, is calculated using the following equation: market cap = share price x shares outstanding.

2. McCormick's book value of debt is $3,237,150,000. Book value of debt (D) is calculated as follows: book value of debt = last two-year average of current portion of long-term debt + last two-year average of long-term debt & capital lease obligation.

3. Cost of Equity = risk-free rate of return + beta of asset x (expected return of the market - risk-free rate of return)

Risk-free rate of return = 2.82 percent.

Beta = 0.30.

Market premium = (expected return of the market - risk-free rate of return) = 6 percent

4. Cost of debt = last fiscal year-end interest expense / book value of debt (D). McCormick's last fiscal year end interest expense is $95.7 million.

5. Use the effective tax rate of 25.705 percent.

QUESTION 5=Find the weighted average cost of capital (WACC)?

Answer #1

First of all lets calculate cost of equity

cost of equity = Risk free rate of return + beta(Market premium)

=2.82%+0.3(6%)

=2.82%+1.8%

=4.62%

Cost of debt = Interest rate(1-tax rate)

=(Interest/Book value of debt) (1-0.25705)

=(95700,000/3,237,150,000) (0.74295)

=2.956304%(0.74295)

=2.1964%

Statement showing WACC

Source of capital | Capital | Weight | K | WACC=Weight*k |

Equity | 14237510000 | 81% | 4.62% | 3.7642% |

Debt | 3237150000 | 19% | 2.20% | 0.4069% |

17474660000 | 4.1710% |

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