Question

Estimating Market and Book Values and Cost of Capital Measures

The December 31, 2007, partial balance sheet and the 2007 retained earnings statement from Colgate-Palmolive Company (CL) follow ($ millions, except per share amounts). The website Finance.Yahoo.com reported that the total market capitalization of Colgate-Palmolive was $39.91 billion and its stock price was $78.40 as of December 31, 2007. Also, Yahoo estimates its total enterprise value at $42.49 billion, and its market beta at 0.46. In addition, Colgate-Palmolive's average pretax borrowing cost is 4.80%, and its marginal tax rate is 35%. Assume that the risk-free rate equals 5.30% and the market premium equals 5.70%.

Liabilities and Shareholders' Equity
Notes and loans payable	$ 155.9
Current portion of long-term debt	138.1
Accounts payable	1,066.8
Accrued income taxes	262.7
Other accruals	1,539.2
Total current liabilities	3,162.7
Long-term debt	3,251.9
Deferred income taxes	264.1
Other liabilities	1,177.1
Total liabilities	7,855.8
Shareholders' Equity
Preferred stock	197.5
Common stock, $1 par value (1,000,000,000 share authorized, 732,853,180 shares issued)	732.9
Additional paid-in capital	1,517.7
Retained earnings	10,627.5
Accumulated other comprehensive income	(1,666.8)
	11,408.8
Unearned compensation	(218.9)
Treasury stock, at cost	(8,903.7)
Total shareholders' equity	2,286.2
Total liabilities and shareholders' equity	$10,142.0

Common Shares Outstanding
Balance, December 31, 2006	512,658,587
Shares issued for stock options	10,051,559
Treasury stock acquired	(18,062,892)
Other	4,387,547
Balance, December 31, 2007	509,034,801

(a) Verify Yahoo's computation of Colgate-Palmolive's market capitalization using the data from its financial report excerpts above. (Round your answer to two decimal places.)
Market capitalization = $Answer

x Answer

shares = $Answer

billion

(b) Compute the book value of Colgate-Palmolive's long-term debt as of December 31, 2007.
$Answer

million

(c) Compute the market value of Colgate-Palmolive's debt using the data from Yahoo. (Round your answer to two decimal places.)
$Answer

billion

(d) Identify reasons behind the difference between the amounts computed in parts (b) and (c). (Select all that apply.)
Answeryesno

The market price of Colgate-Palmolive's debt changed in value on December 31, 2007.
Answeryesno

The market value of debt doesn't include the issuing of new treasury stock.
Answeryesno

The market value and book value of debt differs due to accounting usage of historical cost.
Answeryesno

Yahoo.Finance.com might include other liabilities, such as lease obligations, in the calculation of debt.

(e) Compute Colgate-Palmolive's cost of debt capital. (Round your answer to one decimal place.)
Answer

%

(f) Compute Colgate-Palmolive's cost of equity capital. (Round your answer to one decimal place.)
Answer

%

(g) Using your rounded answer from (e) and (f) above, compute Colgate-Palmolive's weighted average cost of capital. Use the market capitalization from Yahoo.Finance.com and your rounded answer from (c) above for this calculation. (Do not round until your final answer. Round answer to one decimal place.)
Answer

%

Answer 1

a)Market capitalization = stock price*number of shares outstanding

= $78.43*509,034,801 shares

= $39,923,599,442.43 or $39.92 billion

b)Book value of Colgate-Palmolive's long-term debt = $3271.9 + $131.8(Current poertion of long term debt)

= $3410 million

c)Market value of Colgate-Palmolive's debt= Total enterprise value- market capitalization

= $42.49 billion-$39.92 billion

=$2.57 billion

d)1)Yahoo.Finance.com might include other liabilities, such as lease obligations, in the calculation of debt.- Yes

)The market price of Colgate-Palmolive's debt changed in value on December 31, 2007 - Yes

  3)The market value and book value of debt differs due to accounting usage of historical cost. - Yes

4)The market value of debt doesn't include the issuing of new treasury stock. - No

e)Colgate-Palmolive's cost of debt capital = 5.10%(1-35%)

= 3.315%

f) Colgate-Palmolive's cost of equity capital

Using CAPM, K_e= R_f+beta(market premium)

= 5.4%+(0.46*5.8%)

= 8.068%

g)Colgate-Palmolive's weighted average cost of capital.

= {3.315%(2.57billion)/(2.57+39.92 billion)}+{8.068%(39.92Billion/(2.57+39.92 billion)}

= 0.0020billion+0.0758 billion

= 0.0778 or 7.8%