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Question Title:
The Cost of Capital
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</p> <p><b>Chart 1</b> </p> <p>XXXXX X XXXXX XXX XXXXXX XXXXXXXX by the XXXXXX holders (9.X%) is substantially XXXXXX XXXX the return XXXXXXXX XX XXX debt holders (5.X%) since XXX risk XXX XXX XXXXXX holders XX higher XX compare XX the XXXX for XXX debt XXXXXXX. XXX assets XX XXXXXXXXX Mountain are financed entirely through equity XXXXXX XXXXX it XXX no debt. Consequently, the cost of XXXXXX (8.2%) XXXXXXXX an estimate of the XXXX of capital, XXXXX the XXXXXX XX XXX only XXXXXX XX XXXXXXX. By interpretation, XXX XXXXXXXX XXXXXX or cost of XXXXXXX for Sugarloaf XXXXXXXX investments XX XXXXXXXX using XXXXXXX’s estimate XX Sugarloaf Mountain’s XXXX of equity, 8.X%. XXX risk XX XXXX holders XX lower XX compare to XXXXXX holders XXXXXXX XXXX XXXXXXX XXXXXXXXXX the first XXXXX on the returns. The XXXXXXXX XXXXXXX required XXXXXX of XXXX XXX equity XXXXXXX XXXXX XX the XXXXXXXX return XX XXX assets return XXXXX XXXX holders XXX equity holders XXXXXXX to obtain XXX XXXXXXX assets XXXXXXX. It XX preferable to XXX the XXXXXXX capital structure weights in XXXXXXXXXX the XXXX of capital XXX it is XXXXXXXXXXXXX XX reject XXX XXXXXXX if it has an XXXXXXXXXXXXX XXXXXXX XXXXXXXXX. For White XXX XXX XXXX XXX XX XXXXXXXX XXXX multiplying the XXXXXXX by XXX required returns because White Oak XX XXXXXX with XX% XXXX XXX XX% XXXXXX. XXXXXXX XXXX XXXXXXXX XXX XXX XXXXXXXXXX XXXXXXXXX it cost White XXX XXXX X.3% to XXXXXXX debt returns of X.X% with a marginal XXX XXXX of 34% (XXXXXXX,2014). </p> <p><b>XXXXXXXX of XXXX XX XXXXXXX XX XXXXX XXXXX </b> </p> <p>In order XX XXXXX XXX XXXXXXXX XXXXXX for the assets XX XXXX XXXX XXX XXXXXXXX XXXXXXX required XXXXXX of XXXXXX XXX XXXX investors. XXX standard approach for cost XX capital XXXXXXXXXX is XXXXXXXXXX through XXX method XX XXXXXXXXXX a XXXXXXXX average XXXX XX capital (WACC) XX using XXX XXXXXXXX XXXXXXX of XXX XXXXXXXXXX costs XX debt XXX equity. Since XXX risk profile linked to XXXX XXX jellies business is XXXXX XXXXXXXXX XXXX the main bakery business of the Tasty Bread XXXXXXXXX, XXXXX Bread has XXXX excluded. WACC of Tasty Bread XX XXXXXX XX XXXXXXXX XXX XXXX adjusted benchmark XXXX XX X.X%. While XXXXXX XXX XXXXXXXXXX decision the XXXXXXXXX of XXXXXXXXXX firms has some criticism, XXXXXXXXX in order to XXXXXXX this XXXXXXXX WACC XX XXXXX XXXXX is XXX included on the XXXXX the XXXX of capital isn't the XXXX XX XXXXX. The jams XXX XXXXXXX XXXXXXXXXX XXXXXXXX XX be XXXX XXXX XXX XXXXXXXXX of XXXX and XXXXXXX XXX not XXX XXXXXX XXXXXXXXX; this XXX shows XX XXXXXXXX where the money is going XXX not XXXXX the money XX coming. Tasty Bread's XXX XXX jellies investment is estimated XX XXX XXXXXXXX XXXXXXXX XXXXXXXXX of XXXXX River X.0%, XXXXX XXX X.8% XXX Sugarloaf Mountain X.X%. The consistency of the XXXXXXXXX XXXXXXXXX his confidence that XXX XXXXXXXXXXX hurdle rate for the XXXXXXXXXX XXXXXXX XXX X.0% XXXXX that XXXXXXXX to be XXX XXXXXXXXXX cost of capital XXX investments of similar risk. Because XXX 8.X% cost of capital XXXXXXXX the expected return XX 7.X%. </p> <p><b>Recommendations</b> </p> <p>It XX worth noting that 8.0% cost of capital XXXXXXX XXXX the expected return XX X.5% XXXXXXXXX it XXXXX not XXXXXX economic value XXX XXX and XXXXXXX investment under the XXXXXXX proposal. It is XXXXXXXXXXX for Tasty Bread XX XXX a collection of XXXXXXXXXX firms in order to reduce XXX estimation error XXXXXXXXXX XXXX individual WACC XXXXXXXXX and X.0% XXXX of XXXXXXX XX XXXXXXXX as XXX XXXXXXXXXXX XXXXXXXX for Tasty Bread based on the XXXX of capital XXXXXXXXX XX XXX comparable firms XXXXXX than its own XXXX of XXXXXXX. XXXXXXXXXXX, XXX J.M XXXXXXX Company can also be recommended as an alternative XXXXXXXXXX company for estimating XXX XXXX XX XXXXXXX at Tasty Bread. The XXXXXXXX outcome XX weighted XXXXXXX cost of capital XX XXXXX additional XXXXXXXXXXXXXX XXX XXXXXXX with XXX XXXXX calculated XXXXXXXX average cost of XXXXXXX of XXXXX comparable XXXXX XXX in case if Smucker XXXXXXX a XXXXX risk associated then it XXXX be a XXXX alternative XXXXXXXXX not. XXXXX on XXXX-XX-capital XXXXX XX 15%, cost XX XXXXXX XX 8.X%, cost XX debt XX 4.5% the WACC XX XXXXXXX is XXXXXXXXXX as below: </p> <p><i>WACC (Smucker) = 0.15 × X.5% × (X − XX%) + 0.XX × 8.X% = 7.7>#/i### </i></p> <p><i>The calculated WACC of XXXXXXX XX lower as XXXXXXX to XXX XXXXX already estimated for XXXXX XXXXXXXXXX firms XXXX as Moose River, XXXXX Oak and XXXXXXXXX XXXXXXXX. XX XXXXX XXX higher XXXX XXXXXXXXXX with firm's operations. WACC of X.7% XX XXXXX alternative XXXXXXXXXXXXXX XXXXXXXX XXXXXXXXXX XX XXXXX the XXXXXXXXX XXXXXXX cost of XXXXXXX XXXX is 7.8% XX how XXXXXXXXXX XXXX believed XXXXXXX to XX to the risk of XXX XXXXXXXX XXXXXXX. XXXXX XX XXXX XXXX, it XX recommendable XX use XXX WACC of above XXXXXXXXXX three comparable XXXXX so that there can XX obtained minimum rate XX XXXXXX of %X.8 XX which XXXXX XXXXX produces value for XXX XXXX investors as XXXX as equity XXXXXXXXX (Michael,XXXX) </i></p> <p><i><b>XXXXXXXXXX</b> </i></p> <p><i>Estimation of Cost XX XXXXXXX. (n.d.). <em>Corporate Finance: XXXXXX XXX Practice</em>, 86-XXX. doi:XX.4135/XXXXXXXXXXXXX.XX </i></p> <p><i>XXXXXXX,S. (XXXX). The Cost of XXXXXXX- Principles XXX Practice. XXXXXX XXXXXXXXXX Business. </i></p> <p><i> </i></p> <p><i> </i></p> <p><i> </i></p> <p><i> </i></p> <p><i> </i></p> <p><i> </i></p> <p><i> </i></p> <p><i><br></i></p>">
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