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Weighted Average Cost Of Capital

1 - Introduction

Cadbury Schweppes plc, was formed by two different people in charge of different companies coming together. John Cadbury was in charge of making confectionery and Jacob Schweppes was producing and distributing beverages. Both of these came together in 1969 to form Cadbury Schweppes plc. This company is engaged in the manufacturing, distributing and sale of branded beverages and confectionery. It supplies its products through whole sale and retail outlets in almost 200 countries. The company make focus is on two things confectionery and beverages. Cadbury Schweppes has manufacturing facilities in 25 countries with a range of products on sales in over 170 countries. These products are sold everywhere convenience stores, grocery stores and kiosks.

2 - Cost of Capital

A company’s capital is consists of mostly debt or equity. Equity and debt are external sources of financing and financing from external sources is not without cost. The cost of capital is the cost to raise capital through equity and debt. It can be defined as the weighted sum of the cots of equity and the cost of debt. It determines the rate of return that a firm would receive if it invested its money in another option with a similar risk. A risky business will have a higher cost of capital than one involving less risk as the investors expect to be compensated for the greater risk.

It is easy to determine the cost of debt. Cost of debt is simply the weighted rates of interest paid by the company on its debts. However, cost is equity is not so straightforward. The cost of equity is based on an estimate of a reasonable rate of return on the shareholders' investment. The term ‘reasonable’ is what makes all the difference. There are various models which are used to estimate this reasonable rate of return which will satisfy the shareholders. One such model is Capital Asset Pricing Model (CAPM).
3 - Capital Asset Pricing Model (CAPM)
The Capital Asset Pricing Model...