Question

Over the last twenty years there has been considerable consolidation in the confectionary business​ (e.g., the acquisition of Rowntree PLC by Nestle SA in 1988 and Cadbury by Kraft in​ 2010). You have a suspicion that a large food manufacturer might try to buy Tootsie Roll. You want to calculate a DCF valuation for Tootsie Roll. The first step in your valuation is to calculate Tootsie​ Roll's weighted average cost of capital. Using the data provided​ below, answer the questions that follow and calculate Tootsie​ Roll's WACC.

The​ risk-free rate is 4.75%.

  

The expected return on the market portfolio is 9.5%.

  

The corporate tax rate is 35%.

  

The face value of Tootsie Roll’s outstanding bonds is $2 300million.  

  

The coupon rate on Tootsie Roll’s bonds is 5.5%. Assume that the bonds pay annual coupons.

  

The yield to maturity on Tootsie Roll’s bonds is 6%.

Tootsie Roll’s bonds mature in 12 years.

  

Tootsie Roll has 1,600 million common shares outstanding.

  

The market price of Tootsie Roll’s common shares is $6.00

.

Tootsie Roll’s Beta is 0.8

.

a.  What is Tootsie​ Roll's after-tax cost of​ debt?

b.  What is Tootsie​ Roll's cost of​ equity?

c.  What is the market value of​ long-term debt?

d.  What is the capital structure weight for​ equity?

e.  What is Tootsie​ Roll's WACC?

Answer 1

SEE THE IMAGE. ANY DOUBTS, FEEL FREE TO ASK. THUMBS UP PLEASE

The value of debt is calculated using market price till 2 decimals. Thank you