stimating Market and Book Values and Cost of Capital Measures The December 31, 2
ID: 2721077 • Letter: S
Question
stimating Market and Book Values and Cost of Capital Measures
The December 31, 2007, partial balance sheet and the 2007 retained earnings statement from Colgate-Palmolive Company (CL) follow ($ millions, except per share amounts). The website Finance.Yahoo.com reported that the total market capitalization of Colgate-Palmolive was $39.92 billion and its stock price was $78.43 as of December 31, 2007. Also, Yahoo estimates its total enterprise value at $42.49 billion, and its market beta at 0.46. In addition, Colgate-Palmolive's average pretax borrowing cost is 5.10%, and its marginal tax rate is 35%. Assume that the risk-free rate equals 5.40% and the market premium equals 5.80%.
(a) Verify Yahoo's computation of Colgate-Palmolive's market capitalization using the data from its financial report excerpts above. (Round your answer to two decimal places.)
Market capitalization = $Answer x Answer shares = $Answer billion
(b) Compute the book value of Colgate-Palmolive's long-term debt as of December 31, 2007.
$Answer million
(c) Compute the market value of Colgate-Palmolive's debt using the data from Yahoo. (Round your answer to two decimal places.)
$Answer billion
(d) Identify reasons behind the difference between the amounts computed in parts (b) and (c). (Select all that apply.)
Answeryesno Yahoo.Finance.com might include other liabilities, such as lease obligations, in the calculation of debt.
Answeryesno The market price of Colgate-Palmolive's debt changed in value on December 31, 2007.
Answeryesno The market value and book value of debt differs due to accounting usage of historical cost.
Answeryesno The market value of debt doesn't include the issuing of new treasury stock.
(e) Compute Colgate-Palmolive's cost of debt capital. (Round your answer to one decimal place.)
Answer%
(f) Compute Colgate-Palmolive's cost of equity capital. (Round your answer to one decimal place.)
Answer%
(g) Using your rounded answer from (e) and (f) above, compute Colgate-Palmolive's weighted average cost of capital. Use the market capitalization from Ycharts.com and your rounded answer from (c) above for this calculation. (Do not round until your final answer. Round answer to one decimal place.)
Answer%
authorized, 732,853,180 shares issued) 732.9 Additional paid-in capital 1,517.7 Retained earnings 10,627.5 Accumulated other comprehensive income (1,666.8) 11,408.8 Unearned compensation (218.9) Treasury stock, at cost (8,903.7) Total shareholders' equity 2,286.2 Total liabilities and shareholders' equity $10,162.0
Explanation / Answer
a. Market capitalization = stock price*number of shares outstanding = $78.43*509,034,801 shares = $39,923,599,442.43 or $39.92 billion.
b. book value of long term debt = $3,271.9 million (as given in the balance sheet).
c. market value of debt: we will calculate this using the enterprise value formula. enterprise value = market capitalization + preferred equity +market value of debt - cash
thus, $42.49 billion = $39.92 billion + $0.1975 billion + market value of debt
or market value of debt = 42.49 - 39.92 - 0.1975 = $2.37 billion
d. The answer is - The market price of Colgate-Palmolive's debt changed in value on December 31, 2007. Market value of debt changes with any increase or decrease in the interest rates in the market.
e. cost of debt = pre tax borrowing cost * (1-tax rate)
= 5.1%*(1-35%)
= 5.1%*0.65 = 3.32%
f. cost of equity = risk free rate + beta*market premium
= 5.4 + 0.46*5.8
= 5.4+2.67
= 8.07%
g. WACC = cost of debt * weight of debt in total cpaital + cost of equity * weight of equity in total capital
Total capital = market value of debt + market capitalizatiion = 2.37+39.92 = $42.29 billion
weight of debt = market value of debt/42.29 = 2.37/42.29 = 0.06. weight of equity = 1-weight of debt = 1-0.06 = 0.94
WACC = 0.06*3.32% + 0.94*8.07%
= 7.77%
Related Questions
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.