Question
You have recently been hired by Bio Lux Company, in its relatively new treasury management department. Bio Lux was founded five years ago by Jessica
You have recently been hired by Bio Lux Company, in its relatively new treasury management department. Bio Lux was founded five years ago by Jessica Parker. Jessica found a method to produce high quality shampoo using natural ingredients. The shampoo produced by Bio Lux is in a good position to compete with other more established shampoo producers. The company is privately owned by Jessica Parker and her family, and it had sales of $12 million last year.
Bio Lux primarily sells its products through a wholesaler who distributes the products through its network of retailers throughout the country. Bio Luxs growth to date has come from its innovation, quality, and low costs. When the company had sufficient capital, it would expand production. Relatively little formal analysis has been used in its capital budgeting process. Jessica has just read about capital budgeting techniques and has come to you for help. For starters, the company has never attempted to determine its cost of capital, and Jessica would like you to perform the analysis. Because the company is privately owned, it is difficult to determine the cost of equity for the company. Jessica wants you to use a similar company to estimate the cost of capital (WACC) for Bio Lux, and she has chosen Procter & Gamble as a representative company. The following questions will lead you through the steps to calculate this estimate.
1. To estimate the cost of equity for Procter & Gamble, go to finance.yahoo.com and enter the ticker symbol PG. Follow the various links at this website to find answers to the following questions:
a) What is the most recent stock price (and provide the associated date) listed for Procter & Gamble?
b) What is the market value of equity, or market capitalization?
c) How many shares of stock does Procter & Gamble have outstanding?
d) What is the beta for Procter & Gamble?
e) Now go back to finance.yahoo.com and follow the Bonds link. What is the yield on three-month Treasury bills? Using a 6 percent market risk premium, what is the cost of equity for Procter & Gamble using the CAPM?
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