Nestlé Enterprises is estimating its cost of capital for the first time and has made the following estimates: The firm’s debt carries a AAA rating, which is currently yielding 6%; the firm pays taxes at a rate of 30%; the cost of equity is estimated to be 14%; and the firm’s debt is equal to 20% of its enterprise value.
a. What is Nestlé’s estimated WACC?
b. If Nestlé were to increase its debt level to 40% of enterprise value, the firm’s investment banker has told the firm that its credit rating would drop to AA and correspondingly its cost of debt financing would rise to 7%. If the cost of equity corresponding to this new capital structure were to rise to 16%, what would be the firm’s estimated WACC?

  • CreatedNovember 13, 2015
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