1. As of today, McCormick\'s market capitalization (E) is $14,237,510,000. Marke
ID: 2808787 • Letter: 1
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. Find the weighted average cost of capital (WACC).
Explanation / Answer
First we need to calculate the weightage of Debt and equity
Weightage of debt=D/(D+E)= 3237150000/(3237150000+14237510000)
=18.52%
Weightage of equity=E/(D+E)= 14237510000/(3237150000+14237510000)
=81.48%
Now e need Cost of Debt and Cost of equity
Cost of debt = Last Fiscal Year End Interest Expense / Book Value of Debt
=95700000/3,237,150,00= 2.956%
Cost of equity =Risk-Free Rate of Return + Beta of Asset x (Expected Return of the Market - Risk-Free Rate of Return)
=2.82+0.30*6=4.62%
WACC= Weightage of Equity* Cost of Equity+Weightage of Debt* Cost of Debt* (1-Tax rate)
=0.8148*0.0462+0.8152*0.02956*(1-0.25705)
=0.0376+0.01790 =5.55%
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