Question

In: Finance

How do you calculate the cost of debt of each division(Food processing and instruments) for chestnut...

How do you calculate the cost of debt of each division(Food processing and instruments) for chestnut using proxy companies in same industry.

Exhibit 14.4  Finiancial Data for Industry Comparables, December 2013 (dollar figures in millions)
S&P Bond Total Equity Total Equity
Equity Beta Rating Total Debt (Book value) (Market Value)
Chestnut Foods 0.9 A- 461 1,544 1,840
Food Processing Industry
Boulder Brands 0.55 B+ 298 355 958
Campbell Soups 0.6 BBB+ 4,832 1,349 13,223
ConAgra Foods 0.7 BBB- 9,590 5,472 13,805
Diamond Foods 0.75 B- 593 167 578
Flower Foods 0.5 BBB- 923 1,076 4,429
General Mills 0.55 BBB+ 8,645 6,633 31,245
Hormel Foods 0.65 A 250 3,311 11,759
Kellogg 0.6 BBB+ 7,358 3,545 21,841
J. M. Smucker 0.7 BBB+ 2,241 5,168 10,904
Tyson Foods 0.8 BBB 1,942 6,285 11,469
Average
Instruments Industry
Badger Meter 1.06 BBB- 89 197 723
Dresser-Rand 1.4 BB 1,287 1,297 4,549
Flowserve 1.3 BBB- 1,200 1,870 10,767
Honeywell 1.25 A 8,829 17,467 74,330
Idex 1.15 BBB 774 1,573 5,933
Measurement Specialties 1.35 BBB* 129 331 944
Mettler-Toledo 1.1 A* 413 935 7,154
Wendell Instruments 0.52 NA 0 98 230
 
Exhibit 14.3   Capital Market Date, December 2013
Yield
30-day Treasury Bill 0.1%
10-year Treasury Bill 2.8%
10-Year Corporate Bonds
of Industrial Companies
AAA 2.8%
AA 2.9%
A+ 3.2%
A 3.3%
A- 3.5%
BBB+ 3.8%
BBB 4.1%
BBB- 4.6%
BB+ 5.8%
BB 6.5%
BB- 6.5%
B+ 6.8%
B 8.4%
B- 9.0%
Historical Market Risk Premium
(Equity Market Index
Less Government Debt) 6.0%

Solutions

Expert Solution

For each division, we find the average cost of debt for each division based on the cost of debt for each proxy company as shown in the below table

Food Processing Industry Cost of Debt
Boulder Brands B+ 6.80%
Campbell Soups BBB+ 3.80%
ConAgra Foods BBB- 4.60%
Diamond Foods B- 9%
Flower Foods BBB- 4.60%
General Mills BBB+ 3.80%
Hormel Foods A 3.30%
Kellogg BBB+ 3.80%
J. M. Smucker BBB+ 3.80%
Tyson Foods BBB 4.10%
Average 4.76%
Instruments Industry Cost of Debt
Badger Meter BBB- 4.60%
Dresser-Rand BB 6.50%
Flowserve BBB- 4.60%
Honeywell A 3.30%
Idex BBB 4.10%
Measurement Specialties BBB* 4.10%
Mettler-Toledo A* 3.30%
Wendell Instruments NA
Average 4.36%

In conclusion,

Cost of debt for Food Processing division =4.76%

Cost of debt for Instrument division = 4.36%


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