Question

M N O B C D E G H KL Your task is to make an estimate of McCormick & Company's weighted Average cost of Capital (WACC) to use as the discount rate for evaluating capital projects. Interest rates have risen and the CFO plans to borrow $350 million using the 20 year bond that you recommended in Project 4. For most of the past 10 years the company has used 7% as the discount rate. This was based on study of the company's WACC in early 2010. Interest rates have risen since the last study when the McCormick & Co rate average interest rate was 3%. We will use 4% today. Also, there has been a change in the weights between debt and equity. The most significant change was the acquisition of RB Foods. It is the main reason for this study. Here is what our MD&A reported about that acquisition. On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. The purchase price was approximately $4.2 billion, net of acquired cash. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non-voting (see note 13 of the financial statements) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6 of the financial statements). The acquired market leading brands of RB Foods include French's, Frank's Red Hot and Cattlemen's, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. condiments category and provide significant international growth opportunities for our consumer and industrial segments. The RB Foods acquisition resulted in acquisitions contributing more than one-third of our sales growth in 2017 and is expected to result in acquisitions contributing more than one-third of our sales growth in 2018. As part of your work, you will be asked for a recommendation for the cost of equity. There are three widely accepted methods used to calculate the cost of equity. They are the Capital Asset Pricing Model (CAPM), the Discounted Cash Flow approach (DCF) and the debt rate plus a risk premium of 3% to 5% recommended by one board member. This last is often used by very wealthy investors as a check on the other two methods. Instructions Cost of Capital Capital Budgeting

please help with questions 1 - 6. Thanks

Answer 1

I. CAPM = = = Rp + BETA & CRM - Rp). 3% + 0.01x (67) 99) 2- Direct Dividend Model WORK TO DO = 10. (10)+g - 2.387% 73 +7707 8.76% 3. CAPM Rs = = In this Rf = 8% Case we take 4% Borrowing cost and averaged of 311 to 50% Rf + BETA (RPM) 8% +0.01% 10% - 90% PHONES

4. According to to my observation, the best estimate I from of Cost equity is 91. All three com methods the cost of Equity is coming almost 9.1.. but the first estimate which is 9% is most suitable for me as it uses the secondary data. which is reliable. WORK TO DO 5 Total Equity = 1715 Billion Dollars. Debt 7 STB = 5.60 . cost of Debt Current Port: =.835 is Pretax= LLIB = 40.52 . 497 46.95 Post Tax = 47.0 -4*1*X(1-27.51 = 2.90 PHONES weight of Debt = 46.953 73% weight of Equity : Its ) 27/0 17.5 WACC= WACC - 2.90€ 73+ 27% 29.1 4.54%. MARCH MTWTFSSMTWT 10 11 12 13 14 15 16 17 18 19

- Yes, According to me, McCormick should change its discount rate from 7% to 9% as market situation changed too much and Enterprise low discout nate shows higher the value of company which is good for the company best mot for the investors / stakeholders. WORK TO CO