Interest rates have risen and the CFO plans to borrow $350 million using the 20 year bond that you recommended in Project 4. For most of the past 10 years the company has used 7% as the discount rate. This was based on study of the company's WACC in early 2010. Interest rates have risen since the last study when the McCormick & Co rate average interest rate was 3%. We will use 4% today. Also, there has been a change in the weights between debt and equity.

The most significant change was the acquisition of RB Foods. It is the main reason for this study. Here is what our MD&A reported about that acquisition.

On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division ("RB Foods") from Reckitt Benckiser Group plc. The purchase price was approximately $4.2 billion, net of acquired cash. The acquisition was funded through our issuance of approximately 6.35 million shares of common stock non-voting (see note 13 of the financial statements) and through new borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6 of the financial statements). The acquired market-leading brands of RB Foods include Frenchs, Franks RedHot and Cattlemens, which are a natural strategic fit with our robust global branded flavor portfolio. We believe that these additions move us to a leading position in the attractive U.S. condiments category and provide significant international growth opportunities for our consumer and industrial segments.

The RB Foods acquisition resulted in acquisitions contributing more than one-third of our sales growth in 2017 and is expected to result in acquisitions contributing more than one-third of our sales growth in 2018.

As part of your work, you will be asked for a recommendation for the cost of equity. There are three widely accepted methods used to calculate the cost of equity. They are the Capital Asset Pricing Model (CAPM), the Discounted Cash Flow approach (DCF) and the debt rate plus a risk premium of 3% to 5% recommended by one board member. This last is often used by very wealthy investors as a check on the other two methods.

Question:

Rick Malcolm is an advisor to a board member who works at a private equity firm. He has told the CFO that sophisticated investors use a quick estimate of the cost of equity. He says that the cost of equity must be above the company's debt rate. The estimate is that 3% to 5% should be added to the company's long term interest rates. McCormick & Company estimates its current borrowing cost at 4%. Make your own estimate of the relative risk of McCormick & Company. What is the Cost of equity, rs using this own debt plus a 3% to 5% formula.