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Dean Food

In: Business and Management

Submitted By pimpim24
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DEAN FOODS I- Measuring Riskfree Rate
Companies in the USA: Treasury Bill Rate analysis and government bond rate for long term analysis Rj=Rf+βRm-Rf β=0.91 Rf=10 year US Treasury rate the risk free rate=0.039 Rm= 0.028 1. Rj=0.039+0.910.028-0.039=0.02899 or 28.99 %

II- Risk Regression A. How well or badly did your stock do, relative to the market, during the period of the regression?
Intercept-Riskfree Raten1-β=Jensen'sAlpha
Dean Food:
Monthly:
-0.004-0.00325601-0.91=-0.00401
Annually:
-0.004-0.039601-0.91=-0.004059

B. What proportion of the risk in your stock is attributable to the market? What proportion is firm-specific?
R2 of Regression=0.6745 or 67,45% suggests that 67,45% of the risk in Dean Food comes from market sources and that the balance of 32.55% come from firm-specific components
Firm-specific=1-0.6745=0.3255

C. Annualize the required return on your stock.
Riskless Rate+β×Risk Premium Rj=0.039+0.915%=0.0845 Or 8.45%

III- Estimating a Bottom up Beta
Bottom-up unlevered beta=Current beta1+1-tax rateAverage debtEquity Tax US = 35 % Beta = 0.91 Deb/Equity = 0.53 Bottom-up unlevered Beta = 0.911+1-35%0.53 = 1.04

IV- Estimating a Cost of Debt
An interest coverage ratio
EBITInterest Expense=13,734,0003,058,000,000 = 4.49
A synthetic rating for Dean Foods 4.25 < 4.49 < 5 therefore rating is A
C.A pre-tax cost of debt for your firm
Dean Food’s synthetic rating is A
→ Default spread based upon rating = 1.00%
→ Pre-tax cost of debt=Riskfree Rate+Default Spread=3.9%+1.00%=4.9% D. An after-tax cost of debt for your firm
→ After-tax cost of debt=Pre-tax cost of debt×1-tax rate=4.9%×1-35%=3.185%

Estimating Cost of Capital A. The weights for each, estimate the cost of capital for your firm
Bottom-up unlevered beta=1.04
Levered beta=Unlevered beta×1+1-Tax rate×DebtEquity
Levered beta=1.04×1+1-35%×0.53=0.9095

Equity
Cost of equity=Riskfree rate+Beta×Risk Premium=3.9%+0.9095×5%=8.45%
Market Value of Equity=Market price per share×Shares outstanding=US$10.5×5.64billion=US$59.22 billion
EquityDebt+Equity=59.2232.24+59.22=64.75%
Debt
After-tax Cost of debt=Riskfree rate+Default Spread×1-t=3.9%+1.00%1-35%=3.185%
Market Value of Debt=US$32.24 billion
DebtDebt+Equity=32.2432.24+59.22=35.25%
Cost of Capital=8.60%×64.75%+3.185%×35.25%=6.59% B. How different would your cost of capital have been, if you used book value weights?
Market Value of Equity=Market price per share×Shares outstanding=US$ 8.32×5.64billion=US$46.92 billion
EquityDebt+Equity=46.9232.24+46.92=59.94%
DebtDebt+Equity=32.2432.24+46.92=40.06%
Cost of Capital=8.60%×59.94%+3.19%×40.06%=6.43%
So Cost of capital decrease from 6.59 % to 6.43% C. Estimate WACC for your company with calculation model
WACC=EV×Re+DV×Rd×1-Tc
WACC=59.2232.24+59.22×8.50%+46.9246.92+59.22×3.185%×1-35%=7.92%

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