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KMBSolution13 - Kimberly-Clark Corporation(KMB Solution to...

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Kimberly-Clark Corporation (KMB) Solution to Continuing Case, Chapter 13 THE COST OF CAPITAL FOR OPERATIONS The equity cost of capital according to the CAPM (as calculated in Chapter 3) is: Equity cost of capital = 4.5% + (0.88 × 5.0%) = 8.9% Additional ingredients to get the cost of capital for operations are: Market value of the equity = 482.9 million shares × $64.81 = $31,297 million Value of operations = Market value of equity + NFO = $31,297 + 3,662 = $34,958 mill. After-tax cost of net debt = Nominal cost of net debt × (1 - t) = 5.77% × (1 - 35.6%) = 3.72% The cost of capital for operations is: Cost of capital for operations (WACC) = × + × % 72 . 3 958 , 34 662 , 3 % 9 . 8 958 , 34 297 , 31 = 8.4% (The equity cost of capital is always higher that the cost of capital for operations if the firm has positive financial leverage.) There are some dangers in applying this calculation: Look at Box 13.3 in Chapter 13. In a period where the risk-free interest rate was 4.5%, 8.4% is a reasonable required return for KMB. In Chapters 14 and 15 we will look at the sensitivity of our analysis to modifying this rate. SUMMARY FINANCIAL STATEMENTS FOR 1999-2002 Reformulated statements for 2003 and 2004 are in the case solution for Chapter 12. Here are summary numbers for the full set of years, 1999-2004. Only the part of the income statement that reports sustainable operating income is given as this is the operating income that is likely to persist into the future.
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Sustainable operating income (in millions of dollars): 2004 2003 2002 2001 2000 1999 Net sales 15,083 14,026 13,232 14,524 13,98 2 13,007 Cost of products sold 10,015 9,232 8,538 8,615 8,229 7,682 Gross margin 5,068 4,794 4,694 5,909 5,753 5,325 Core operating expenses 2,562 2,463 2,326 3,571 3,119 2,890 Operating income from sales, before adjustments 2,506 2,332 2,368 2,338 2,634 2,435 Adjustments: Expected return on pension assets (324) (286) (336) (368) (398) (353) Actuarial pension loss 83 74 15 5 (20) 5
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