New problem f or General mills Rating Fitch: A Price 104.32 Coupon(%) 3.150 Matu
ID: 2758205 • Letter: N
Question
New problem for General mills
Rating Fitch: A
Price 104.32
Coupon(%) 3.150
Maturity 15-Dec-2021
YTM(%) 2.477
Current yield(%) 3.020
Do you issue preferred stock?
No. We only issue common stock.
Cost of Debt
-Use the yield to maturity from either your company’s actual bond or from the similarly rated company’s bond as an estimate for your company’s pre-tax cost of debt.
-Calculate your company’s after-tax cost of debt using a 35% marginal tax rate. (Pre-tax cost of debt)(1 – marginal tax rate). Note bond rating for each company.
Cost of Preferred Stock
-If your company has preferred stock outstanding on its balance sheet, search for the current price of its preferred stock.
-Calculate the cost of preferred using the following formula: Dividend/Price.
-If you cannot find the price of the preferred, see me. Either the WSJ or the company’s annual report should give the preferred dividend (see balance sheet or footnotes to the financial statements).
Cost of Equity
-Estimate the cost of equity at least two ways:
CAPM (You must use CAPM as one of your methods.)
Reworked Gordon Model: (D1/P) + G
Bond yield + risk premium
-Remember to use the current RFR (10 year Treasury Bond). Assume Required Return on the Market is 11%. Get current stock price. Get estimated D1 and G from either Valueline or Yahoo Finance (analyst estimates).
-Decide on your best estimate of cost of equity to use in calculating WACC.
Calculate the Weights of each Component of the Company’s Capital Structure
-Look at the company’s balance sheet and assume their current capital structure is their target capital structure.
-Use only Long Term Debt and any Capitalized Leases in the weighting for debt.
-See if the company has any preferred stock to weight.
-Use total common shareholder’s equity for the weight of common equity.
Calculate the Company’s Weighted Average Cost of Capital (WACC).
Explanation / Answer
Current yield is the pre tax cost of debt, i.e., 3.02% is the pre tax cost of debt.
Tax rate is 35%
Thus,after tax cost of debt is 3.02*(1-.35)=1.96%
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