Grand Met Case Essay

1127 Words Feb 27th, 2013 5 Pages
Grand Metropolitan PLC

Company Background and Issues

Grand Metropolitan PLC was a multinational holdings company that faced a hostile takeover threat in the late 1980's and early 1990's. The company specialized in wine and spirits. The headquarters for operation was in London, England at the time of this case.

The major dilemma at hand is avoiding a takeover. The economy was bad at the time, and the company's stock price was thought to be undervalued, as their low P/E ratio of 13.3 indicated. Management needs to find out why their stock price is so undervalued.

A new strategy of Grand Metropolitan's was to capitalizing brand value on the balance sheet. Another strategy of management was to divest in low growth areas and
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The WACC for Food Processing came to 12.12%. And the WACC for Drinks came to 11.5513%. We used exhibit 8 to find the average cost of equity and debt for the comparable companies in each business segment and forecasted it on to Grand Metropolitan.

We noticed a high cost of equity for Grand Metropolitan. This comes at a time when the company is trying to reduce its debt. The cost of equity was found to be 16% in the U.S. and about 18% in Great Britain.
Cost of Debt:
To find our cost of debt we took the market value of debt to capital ratios for each segment, found on exhibit 8, for our weights. Our assumptions to find the cost of debt, since it was not explicitly given, were as follows; we used the bond ratings given under each segment, we then used the yields by rating category chart on exhibit 9 to find the appropriate rates and found an average of the ratings assigned for each segment. Now having found our weights and rates we are able to with the tax rate found within each segment find our cost of debt.
Currency rate risk:
Due to the diversity of markets that Grand Metropolitan operates within, the company is inherently exposed to currency conversation rate risk. The majority of the subsidiaries of Grand Metropolitan operate within the United Kingdom and the United States markets, which utilize the Great Britain Pound and the U.S. Dollar respectively. With Grand Metropolitan's headquarters in London, England, they have a large number, 77%, of their

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