Question

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?

Answer 1

7.51%

Step-by-step 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%