Ask Question, Ask an Expert

+61-413 786 465

info@mywordsolution.com

Ask Accounting Basics Expert

Accounting


Home >> Accounting Basics

Diageo PLC Chapter 8 Minicase

A recent annual report for Diageo PLC explains that its investments are expected to generate cash returns that exceed its "long-term cost of capital," which Diageo estimated to be approximately 10%. Diageo has three main lines of business: food items, such as Haagen Dazs ice cream; alcoholic beverages, such as Seagrams; and restaurants, such as Burger King. Diageo did not report costs of capital separately for these three businesses. Information from the annual report is given here, followed by relevant market data. Financial information: Cash and marketable securities $1,498 million (approximates market value) Short-term debt $706 million (approximates market value) Long-term debt $8,509 million ($8,747 million market value) Common shares outstanding 788 million Year-end share price $55.875 Income tax rate 34% Market data: Diageo's beta 1.00 Diageo's long-term borrowing rate 6.75% Riskless returns: Short term 5.13% Intermediate term 5.50 Long term 6.00 Market risk premium: Short term 8.40% Intermediate term 7.40 Long term 7.00

The following table provides information concerning publicly traded restaurant firms.

FIRM STOCK LISTEDBETATOTAL DEBT ($ MILLIONS)PREFERRED STOCK ($ MILLIONS)COMMON SHARES (MILLIONS)CLOSING STOCK PRICE Applebee'sNASDAQ1.3028.5-31.0$22.750 Bob Evans FarmsNASDAQ0.9554.7-42.319.000 Brinker InternationalNYSE1.70104.7-72.115.125 CKE RestaurantsNYSE1.1586.7-18.416.000 McDonald'sNYSE1.004,820.1411.1694.045.125 NPC InternationalNASDAQ0.8081.4-24.57.250 Shoney'sNYSE0.90440.4-41.510.250 Wendy's InternationalNYSE1.15147.0-103.421.250

QUESTIONS

1. Diageo subtracts the value of its portfolio of short-term investments, which is held outside the United States and is not required to support day-to-day operations, from its total debt when calculating its "net debt ratio." Use Diageo's net debt ratio to calculate Diageo's overall WACC.

2. Should Diageo use its overall cost of capital to evaluate its restaurant investments? Under what circumstances would it be correct to do so?

3. Estimate the cost of capital for Diageo's restaurant businesses.

4. Explain why there is a difference between Diageo's overall cost of capital and the cost of capital for its restaurant businesses.

Accounting Basics, Accounting

  • Category:- Accounting Basics
  • Reference No.:- M91645264
  • Price:- $40

Priced at Now at $40, Verified Solution

Have any Question?


Related Questions in Accounting Basics

Question - journal entries for job order costingcycle

Question - Journal entries for job order costing Cycle Specialists manufactures goods on a job order basis. Durin the month of June, three jobs were started in process. (There was no work in process at the beginning of t ...

Question purpose of assignmentthis assignment is critical

Question: Purpose of Assignment This assignment is critical for students to gain a fundamental understanding of management's and auditor's responsibility for detecting errors, material fraud, and illegal acts. This assig ...

Question - morbes magazine is a magazine publisher who

Question - Morbes Magazine is a magazine publisher who began their operations on April 1, 2018. On this date, Morbes sold 40,000 one-year subscriptions, with each subscriber paying $36. Subscribers are required to pre-pa ...

Question - cullumber company purchased machinery for 176400

Question - Cullumber Company purchased machinery for $176,400 on January 1, 2017. It is estimated that the machinery will have a useful life of 20 years, salvage value of $14,700, production of 88,600 units, and working ...

Question - pandora pillow companys planned production for

Question - Pandora Pillow Company's planned production for the year just ended was 10,000 units. This production level was achieved, but only 9,000 units were sold. Other data follow: Direct material used$40,000 Direct l ...

Question - santana rey created business solutions on

Question - Santana Rey created Business Solutions on October 1, 2015. The company has been successful, and Santana plans to expand her business. She believes that an additional $86,000 is needed and is investigating thre ...

Question - kiddie world uses a periodic inventory system

Question - Kiddie World uses a periodic inventory system and the retail inventory method to estimate ending inventory and cost of goods sold. The following data are available for the quarter ending September 30, 2018:   ...

Question - jalisco corporation has net income of 281000 for

Question - Jalisco Corporation has net income of $281,000 for the year ended December 31, 2010 and common shares outstanding of 100,000. The company did not issue or repurchase additional common shares during the year. J ...

Assignment -part a - you are working as an accountant in a

Assignment - Part A - You are working as an accountant in a local accounting firm. You have been approached by Oliver and Sydney, the owner of Sugariffic, a start-up wholesaler. They have chosen Xero as their cloud based ...

Question - retained earnings at 111x was 150000 and at

Question - Retained earnings at 1/1/1X was $150,000 and at 12/31/1X it was $200,000. During 2010, cash dividends of $50,000 were paid and a stock dividend of $30,000 was issued. Both dividends were properly charged to re ...

  • 4,153,160 Questions Asked
  • 13,132 Experts
  • 2,558,936 Questions Answered

Ask Experts for help!!

Looking for Assignment Help?

Start excelling in your Courses, Get help with Assignment

Write us your full requirement for evaluation and you will receive response within 20 minutes turnaround time.

Ask Now Help with Problems, Get a Best Answer

Why might a bank avoid the use of interest rate swaps even

Why might a bank avoid the use of interest rate swaps, even when the institution is exposed to significant interest rate

Describe the difference between zero coupon bonds and

Describe the difference between zero coupon bonds and coupon bonds. Under what conditions will a coupon bond sell at a p

Compute the present value of an annuity of 880 per year

Compute the present value of an annuity of $ 880 per year for 16 years, given a discount rate of 6 percent per annum. As

Compute the present value of an 1150 payment made in ten

Compute the present value of an $1,150 payment made in ten years when the discount rate is 12 percent. (Do not round int

Compute the present value of an annuity of 699 per year

Compute the present value of an annuity of $ 699 per year for 19 years, given a discount rate of 6 percent per annum. As

Follow Us

© Copyright 2013-14 mywordsolution.com All rights reserved