Use the data provided on Cadbury to answer the question below.The risk free rate is 4.25%.The expected return on the market portfolio is 9.75%.The corporate tax rate is 40%.The face value of Cadbury's outstanding bonds is 2.450 billion pounds sterling.The coupon rate on Cadbury's bonds is 4.5%.Assume that the bonds pay annual coupons.The yield to maturity on Cadbury's bonds is 4.5%.Cadbury's bonds mature in 7 years.Cadbury has 1.650 billion common shares outstanding.The market price of Cadbury's common shares as of Dec 31,2008 is 6.25 pounds sterling.Cadbury's Beta is 0.8.Cadbury's cost of debt (after-tax)is 2.7%.Cadbury's cost of equity is 8.65%.What is Cadbury's WACC?

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Quizplus · Accepted Answer

First calculate the capital structure weights for debt and equity. Calculate the market value of the debt: 11ea7fdb_fc72_3592_a768_511e929837ec_TB2902_11 = C × 11ea7fdb_fc72_3593_a768_839352c7c6e1_TB2902_11 + 11ea7fdb_fc72_3594_a768_3d2fe89dacf0_TB2902_11 11ea7fdb_fc72_5ca5_a768_b1c567208d17_TB2902_11 = (0.045 × £2.45) × 11ea7fdb_fc72_5ca6_a768_c58b475b670b_TB2902_11 + 11ea7fdb_fc72_5ca7_a768_c361feedffba_TB2902_11 = £2.45B Calculate the market value of the equity: $6.25 × 1.650B = $10.3125B5 V = D + E = 2.450B + 10.3125B = 12.7625B W_d = D/V W_d = 2.450 / 12.7625 = 19.2% W_e = E/V W_e = 10.3125 / 12.7625 = 80.8% Compute the WACC: WACC = W_dK_d 11ea7fdb_fc72_83b8_a768_db6a2a88e029_TB2902_11 + W_pK_p + W_eK_e WACC = (0.192 × 0.027) + (0.808 × 0.0865) = 7.51%

Use the Data Provided on Cadbury to Answer the Question