Question

What is the weighted average cost of capital of General mills ? please show the work, Thank you! search the data i don't have any

Answer 1

Answer: Formula of WACC:

WACC = (E/V) * Re + (D/V) * Rd (1-Tc)

Where:

• (E/V) = Equity portion in value of firm
• (D/V) = Debt portion in value of firm
• Re = Cost of equity
• Rd = Cost of debt
• Tc = Tax rate

Current WACC of General Mills as on February 2019.

As on Feb 2019, Average book value of debt was $12650.15 Million while market value of equity was $31622.14, we took the book value of debt because market value of debt is difficult to calculate.

Cost of equity (Re) = Rf + Beta (Market premium)

Re = 2.31% + .94 * 6% = 7.95%

Cost of Debt (Rd) = Interest expense / Book value of debt.

Interest expense as on May 2018 = 385.4 Million

Rd: 385.4 / 12650.15 = 3.046%

Latest two year average tax rate = 15.765%

WACC = (31622.140 / 44272.29) * .0795 + (12650.15/44272.29) * .03046 (1-.15765)

WACC = 6.41%