7 Cargill's Cost of Capital. Cargill is generally considered to be one of the three largest privately held companies in the world. Headquartered in Minneapolis, Minnesota, the company has been averaging sales of over $50 billion per year over the past five years. Although the company does not have publicly traded shares, it is still extremely important for it to calculate its weighted average cost of capital properly in order to make rational decisions on new investment proposals.

Assuming a risk-free rate of 2.50%, an effective tax rate of 40%, and a market risk premium of 5.50%, estimate the weighted average cost of capital first for companies A and B, and then make a 'guesstimate' of what you believe a comparable WACC would be for Cargill. Stevenson-Kwo and the Riddle. Use the information in the table opposite to answer ques- tions 8 through 10. Stevenson-Kwo is an American con- glomerate that is actively debating the impacts of international diversification of its operations on its capital structure and cost of capital. The firm is planning on reducing consolidated debt after diversification.

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Company A Company B Cargill Company sales Company's beta $4.5 billion $26 billion $50 billion 0.86 0.78 ?? Credit rating AA AA Weighted average cost of debt 6.885% 7.125% 6.820% Debt to total capital 34% 41% 28% International sales/Sales 12% 26% 45%