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.

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The​ risk-free rate is

5

​%.

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The expected return on the market portfolio is

8.25

​%.

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The corporate tax rate is

38

​%.

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The face value of Tootsie​ Roll's outstanding bonds is

​$2 comma 300

million.  

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The coupon rate on Tootsie​ Roll's bonds is

5

​%.

Assume that the bonds pay annual coupons.

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The yield to maturity on Tootsie​ Roll's bonds is

7

​%.

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Tootsie​ Roll's bonds mature in

8

years.

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Tootsie Roll has

1 comma 650

million common shares outstanding.

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The market price of Tootsie​ Roll's common shares is

​$6.05

.

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Tootsie​ Roll's Beta is

0.8

.

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

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