Question Seven: WACC Ripley Foods is considering diversifying its business into snack foods from its current base in cheese, milk, and related products. Ripley realizes that its WACC is based on its current operations is not acceptable as the snack food industry has a higher level of risk due to intense competition and changing consumer tastes. It has decided to estimate its WACC using a sampling of other pure plays in the new industry. The CFO has collected company data for the snack food industry from different information sources. Beta 1.00 Treasury Spread (%) 1.13 1.21 1.19 1.21 1.39 1.11 Borden Campbell's soup CPC International General Mills Gerber Heinz Hershey Kellogg Quaker Oats Ralston Purina Sara Lee Average 1.06 1.04 1.08 1.36 0.98 1.08 1.09 0.86 0.74 1.04 1.01 1.23 1.25 0.97 0.83 1.18 1.15 Betas were gotten from an information services company, and the treasury spread was estimated using a combination of current bond market quotations and recently issued bank loans. All companies have a similar capital structure. The optimal capital structure for Ripley has been determined to be 40 percent debt and 60 percent equity, which will not be varied after the expansion into snack foods. The risk-free rate is 4 percent and the market-risk premium is 6 percent. The marginal tax rate is 25 percent. REQUIRED: 1. Calculate an appropriate WACC for evaluating the expansion. 2. List three major limitations of this approach