Information from McCormick
Your task is to make an estimate of McCormick & Company's Weighted Average Cost of Capit
rate for evaluating capital projects.
Interest rates have risen and the CFO plans to borrow $350 million using the 20 year bond that
For most of the past 10 years the company has used 7% as the discount rate. This was based o
Interest rates have risen since the last study when the McCormick & Co rate averag
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 stud
reported about that acquisition.
On August 17, 2017, we completed the acquisition of Reckitt Benckiser's Food Division ("RB Foo
plc. The purchase price was approximately $4.2 billion, net of acquired cash. The acquisition wa
approximately 6.35 million shares of common stock non-voting (see note 13 of the financial sta
borrowings comprised of senior unsecured notes and pre-payable term loans (see note 6 of the
acquired market-leading brands of RB Foods include French’s®, Frank’s RedHot® and Cattlemen
with our robust global branded flavor portfolio. We believe that these additions move us to a le
condiments category and provide significant international growth opportunities for our consum
The RB Foods acquisition resulted in acquisitions contributing more than one-third of our sales
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.
used to calculate the cost of equity.
They are the Capital Asset Pricing Model (CAPM), the Disc
and the debt rate plus a risk premium of 3% to 5% recommended by one board member.
investors as a check on the other two methods.