Question

Discuss the best estimates of McCormick & Company’s capital structure used for the acquisition of new product lines. Give credit to any sources you use to support your statements. Discuss how understanding capital budgeting will impact the decision of McCormick and Company’s potential investment in a new factory. Give credit to any sources you use to support your statements.

Answer 1

The weighted average cost of capital (WACC) is the rate that a company is expected to pay on average to all its security holders to finance its assets. The WACC is commonly referred to as thefirm's cost of capital. Generally speaking, a company's assets are financed by debt and equity. WACC is the average of the costs of these sources of financing, each of which is weighted by its respective use in the given situation. By taking a weighted average, we can see how much interest the company has to pay for every dollar it finances.("MKC WACC % | McCormick - GuruFocus.com", 2019) WACC was used as the discount rate because its IRR is greater than the WACC. (, 2019).

In every business, the funds available either as debt or equity, rather known as capital are principally a limited resource. Consequently, companies should ensure that they make the right decision where and when to invest their capital in avoiding misuse of the capital and in promoting the value of the firm. Capital budgeting is mainly the procedures for making these financial decisions. I agree that McCormick uses Capital Budgeting Techniques which are powerful financial methods with which the capital asset investment, a new company and project or the company’s acquisition can be evaluated and the cost justification for the demarcated and proved to the relevant stakeholders. Basically, capital budgeting gives the assessment of the project’s investment versus the generated cash flows by the same project.