Question

What is your best estimate of the WACC for Kraft Foods, Campbell Soup Company, and Del Monte Foods?

Campbell Del Kraft Soup Monte Financial Summary
Revenues (in millions of dollars) 40,386 7,589 3,739
Book value of equity (in millions of dollars) 25,972 728 1,827
Book value of debt (in millions of dollars) 18,990 2,624 1,290


Market Data
Beta 0.65 0.55 0.70
Shares outstanding (in millions of dollars) 1,735 363 182
Share price (dollars as of close April 30, 2010) 29.90 35.64 15.11
Typical Standard & Poor's bond rating BBB− A BB
Representative yield on long-term debt 5.12% 4.36% 6.19%

Answer 1

The WACC for each company cannot be precisely estimated without additional financial data, such as the risk-free rate and market risk premium. However, it involves combining the weighted cost of equity and cost of debt, using market values and bond yields specific to each company.

Step-by-step explanation:

To estimate the Weighted Average Cost of Capital (WACC) for Kraft Foods, Campbell Soup Company, and Del Monte Foods, we need to calculate the proportion of equity and debt in their capital structure, the cost of equity, and the cost of debt for each company. This would require information such as the market value of equity, which can be estimated by multiplying the share price by the shares outstanding, and the representative yields on long-term debt as a proxy for the cost of debt. Additionally, a company's beta is used to calculate the cost of equity using the Capital Asset Pricing Model (CAPM). Without current market data and the risk-free rate or the expected market return to complete this calculation, a reliable WACC cannot be provided here.

For Kraft Foods, for example, we would compute the market value of equity by taking 29.90 (share price) times 1,735 (shares outstanding in millions), which equals a market cap of approximately $51.85 billion. We would then use the book value of debt of $18.99 billion. The beta of 0.65 would help calculate equity cost, combining it with the current risk-free rate and market risk premium. BBB- bond rating and 5.12% yield on long-term debt would help estimate the debt cost. These figures enable us to calculate a proportional cost for each component and sum them for the WACC.