1. As of today, McCormick\'s market capitalization (E) is $14,237,510,000. Marke

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.

What is cost of equity

Explanation / Answer

Cost of equity as per formula (Ke) = 2.82 + 0.30*6 = 4.62%

Cost of debt as per formulae (Kd)= 95.7/3237.25 = 2.96%

Post tax Kd to be used = 2.96(1-0.25705) = 2.20

WACC(Kc) = 4.62 * 14237.51/17474.66 (+) 2.20 * 3237.15/17474.66 = 4.17 %

Cost of equity = 3.76 % (4.62 * 14237.51/17474.66)

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