1. As of today, McCormick\'s market capitalization (E) is $14,237,510,000. Marke

Question

1. As of today, McCormick's market capitalization (E) is $14,237,510,000. Market value of equity (E), also known as market cap, is calculated using the following equation: Market Cap = Share Price x Shares Outstanding. 2. McCormick's book value of debt is $3,237,150,000. Book value of debt (D) is calculated as follows: Book Value of Debt = Last Two-Year Average of Current Portion of Long-Term Debt + Last Two-Year Average of Long-Term Debt & Capital Lease Obligation. 3. Cost of Equity = Risk-Free Rate of Return + Beta of Asset x (Expected Return of the Market - Risk-Free Rate of Return) Risk-free rate of return = 2.82 percent. Beta = 0.30. Market premium = (Expected Return of the Market - Risk-Free Rate of Return) = 6 percent 4. Cost of Debt = Last Fiscal Year End Interest Expense / Book Value of Debt (D). McCormick's last fiscal year end interest expense is $95.7 million. 5. Use the effective tax rate of 25.705 percent.

Find the cost of debt

Explanation / Answer

Find the cost of debt

Cost of debt = Interest expenses / Book value of debt * 100 * ( 1 - effective tax rate )

= 95700000 /  3,237,150,000 * 100 * ( 1 - 0.25705 )

= 2.9563 * 0.74295

= 2.20 %

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