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Over the last twenty years there has been considerable consolidation in the confectionary business (e.g., the acquisition of Rowntree PLC by Nestle SA in 1988

Over the last twenty years there has been considerable consolidation in the confectionary business (e.g., the acquisition of Rowntree PLC by Nestle SA in 1988 and Cadbury by Kraft in 2010). You have a suspicion that a large food manufacturer might try to buy Tootsie Roll. You want to calculate a DCF valuation for Tootsie Roll. The first step in your valuation is to calculate Tootsie Roll's weighted average cost of capital. Using the data provided below, answer the questions that follow and calculate Tootsie Roll's WACC.

bullet

The risk-free rate is

4.54.5%.

bullet

The expected return on the market portfolio is

8.58.5%.

bullet

The corporate tax rate is

3535%.

bullet

The face value of Tootsie Roll's outstanding bonds is

$2 comma 4502,450

million.

bullet

The coupon rate on Tootsie Roll's bonds is

66%.

Assume that the bonds pay annual coupons.

bullet

The yield to maturity on Tootsie Roll's bonds is

77%.

bullet

Tootsie Roll's bonds mature in

1111

years.

bullet

Tootsie Roll has

1 comma 7001,700

million common shares outstanding.

bullet

The market price of Tootsie Roll's common shares is

$6.256.25.

bullet

Tootsie Roll's Beta is

0.70.7.

a.What is Tootsie Roll's after-tax cost of debt?

b.What is Tootsie Roll's cost of equity?

c.What is the market value of long-term debt?

d.What is the capital structure weight for equity?

e.What is Tootsie Roll's WACC?

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