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 $38.53 billion and its stock price was $75.69 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 5.20%, and its marginal tax rate is 35%. Assume that the risk-free rate equals 5.20% and the market premium equals 5.60%.

Liabilities and Shareholders' EquityNotes and loans payable$ 155.9Current portion of long-term debt138.1Accounts payable1,066.8Accrued income taxes262.7Other accruals1,539.2Total current liabilities3,162.7Long-term debt3,171.9Deferred income taxes264.1Other liabilities1,177.1Total liabilities7,775.8Shareholders' EquityPreferred stock197.5Common stock, $1 par value (1,000,000,000 share

authorized, 732,853,180 shares issued)732.9Additional paid-in capital1,517.7Retained earnings10,627.5Accumulated other comprehensive income(1,666.8)11,408.8Unearned compensation(218.9)Treasury stock, at cost(8,903.7)Total shareholders' equity2,286.2Total liabilities and shareholders' equity$10,062.0

Common Shares OutstandingBalance, December 31, 2006512,658,587Shares issued for stock options10,051,559Treasury stock acquired(18,062,892)Other4,387,547Balance, December 31, 2007509,034,801

(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

xAnswer

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.)

Answer

yes

no

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

Answer

yes

no

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

Answer

yes

no

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

Answer

yes

no

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

(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 Ycharts.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

%