The problem:Grand Metropolitan PLC is the largest seller of wine and spirits in the world. It operated primarily in London, United States. In 1991 it exceeded market expectations with a 4.8% increase in pre-tax profit, and the company president stated that the company's goal was to "constantly improve." Despite strong performance during the 1991 global recession, GrandMet's stock price was 10% below the average price-to-earnings ratio of companies in the Standard & Poor's 500 index. And, more importantly, it was rumored that GrandMet, valued over $14 billion in the stock market, could be an acquisition target. Management's dilemma is to understand why the company's shares are trading below what is considered the right price and whether the company is truly undervalued by the market or there are problems consistent with projects and lines of business with negative NPV. WACCI calculation. Cost of DebtPurchasing power parity implies the following relationship between the cost of domestic (GB£) and local ($US) debt: local rd$ = (1 + rd£ of Home) {(1 + local inflation i $)/(1 + Domestic Inflation i£)} -1=> rd£ = (1 + rd$)*(1 + i£)/(1 + i$) -1 = (1+ rd$)*1.043 /1,027 -1 (from the case Exhibit 9)= (1+ rd$)*1.015579 - 1Similarly to convert the small amount of debt issued in Germany, we use the relative inflation rates of the two countries to obtain:rd£ = (1+ rdDM)*1.043 /1.04 = (1+ rdDM)*1.00288 - 1The total outstanding debt by country is reported in Annex 6 of the case, we use the market value of unspecified (long-term) debt in our WACC calculations: US debt: Vd$ = 3,137 +152+110 (Market values) = $3,399 MVps$ = 11.0 (Market value of outstanding preferred shares) UK holdings: Vd£ = 1,794.8+87 +63 (Market Values) = £1...... middle of paper. .....equity exposure of the company even riskier.Figure 1.Figure 2.Cost of debt 8.63% 62% 3.48%Cost of equity capital 15.59% 38% 5.92%WACC 9.40 %Assumed growth 4.80%Pre-tax 1991 963.00Post-tax 1991 625.95 Final value after 1991 14,252.91 Equity value 14,878.86 Shares outstanding 1,005,896,041 Calculated price per share $14.792 Actual price per stock $9,480 Price Undervalue 35.91% Exhibit 3 Overvalue of Shares/Equity Value Growth Rate Value Undervalue4.80% 14,878.86 $ 14.79 36%4.00% 12,675.62 12.60 25%3.00% 10,695.84 10.63 11%2.00% 9,250.95 9.20 -3%1.00% 8,149.98 8.10 -17%