Pitt Beverage (PB) Capital CostFinance-MoellerPB is a publicly listed brewery and bottling company. The firm uses standard weighted average cost of capital (WACC) and CAPM calculations to find its cost of capital. The firm has two divisions. The brewery division’s market value (V) is twice the size of the bottling division’s market value. The target-level of (long-term) debt to market value is one-third (1/3) for PB (25% for the brewery division and 50% for the bottling division respectively). Because of the firm’s relatively high level of debt, it is not reasonable to assume the beta of debt is zero but you can assume that small changes in capital structure do not affect the beta of debt. Projects undertaken by the brewery division are usually short-term (up to 1 year) projects. Bottling projects usually involve longer-term investments, averaging approximately 10 years. Use the financial information on the next page to answer the following questions (do them in order!): Calculate the cost of capital (RWACC) for PB. Calculate the cost of capital (RWACC)for the brewery division of PB. Calculate the cost of equity for the bottling division of PB. The CFO has just returned from a meeting with PB’s bankers and is seriously considering switching a large portion of debt from fixed to floating rate and altering the target capital structure to keep a constant dollar amount of debt rather than a constant proportion. How would that change your calculations above? You do not have to re-do them, just give a brief description of the difference.Consolidated Balance Sheet for PB Corporation (2016: in millions of dollars)Assets 2016Cash 1,234Cash Equivalents 4,567Accounts Receivables 12,345Inventories 11,346Total Current Assets 29,492Net Plant Property and Equipment 60,397Software 5,515Other Net Fixed Assets 28,835Total Assets 124,239 LiabilitiesAccounts Payable 1,365Deferred Income 3,575Compensation and Benefits 4,679Total Current Liabilities 9,619Long-term Debt 45,000Common Stock and Surplus 30,000Retained Earnings 39,620Total Stockholder Equity 69,620Total Liabilities and Stockholder Equity 124,239 Other Financial Information for PBShares outstanding: 1.4billionSeptember 2016 closing price per share: $52Beta[1] 2.2Corporate Tax Rate 34% Industry Information (All debt refers to long-term debt: DLT + E = V)Average Debt-to-Equity ratio forbrewery companies: 0.5Average Equity Beta forbrewery companies1: 1.6Average Debt Beta for brewery companies: 0.3Average Debt-to-Equity ratio for bottling companies: UnavailableAverage Unlevered Equity for bottling companies: Unavailable Bond-market Information and Credit SpreadsRates on long-term government bonds (10-year) 2.25%Rates on short-term government notes (1-year) 1.0%Market Risk Premium (RM -Rf) 6.5%PB Debt (Brewery) Rate Premium above Government 1.75%PB Debt (Bottling) Rate Premium above Government 2.00%[1]Beta has been calculated using regression analysis, where stock returns of the corporation for the past 200 days are regressed on the past 200 days of returns on the S&P 500 stock market index.
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