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16 May, 20:22

Use the data provided on Cadbury to answer the question below. The risk free rate is 4.25%. The expected return on the market portfolio is 9.75%. The corporate tax rate is 40%. The face value of Cadbury's outstanding bonds is 2.450 billion pounds sterling. The coupon rate on Cadbury's bonds is 4.5%. Assume that the bonds pay annual coupons. The yield to maturity on Cadbury's bonds is 4.5%. Cadbury's bonds mature in 7 years. Cadbury has 1.650 billion common shares outstanding. The market price of Cadbury's common shares as of Dec 31, 2008 is 6.25 pounds sterling. Cadbury's Beta is 0.8. Cadbury's cost of debt (afterminus tax) is 2.7%. Cadbury's cost of equity is 8.65%. What is Cadbury's WACC?

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  1. 16 May, 20:45
    0
    7.51%

    Explanation:

    The formula to compute WACC is shown below:

    = (Weightage of debt) * (after cost of debt) + (Weightage of common stock) * (cost of common stock)

    where,

    Weighted of debt = Debt : total firm

    The total firm includes debt, and the equity which equals to

    = 2.450 billion * $ 1 + 1.650 billion * $6.25

    = 2.450 billion + 10.3125 billion

    = 12.7625 billion

    So, Weighted of debt = ($2.450 billion : $12.7625 billion) = 0.192

    And, the weighted of common stock = (Common stock : total firm)

    = $10.3125 billion : $12.7625 billion

    = 0.808

    Now put these values to the above formula

    So, the value would equal to

    = (0.192 * 2.7%) + (0.808 * 8.65%)

    = 0.5184% + 6.9892%

    = 7.51%
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