The Problem:Grand Metropolitan PLC is the world's largest seller of wine and spirits. It mainly operated in London, United States. In 1991, it exceeded market expectations with a 4.8% increase in pretax profits, and the company's chairman said the company's goal was to "constantly improve." Despite performing well 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, rumors were circulating that which GrandMet, valued at more than $14 billion on the stock market, could be a takeover target. Management's dilemma is to understand why the company's stock is trading below what is considered the fair price and whether the company is truly undervalued by the market or whether there are ongoing problems with projects and sectors of activity with negative NPV. Calculation of WACCI. Cost of debtPurchasing power parity implies the following relationship between the cost of housing (GB £) and local (US $) debt: Local rd$ = (1 + Home rd£) {(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 case Exhibit 9) = (1+ rd$)*1.015579 - 1 Similarly, to convert the small amount of debt issued in Germany, we use the relative inflation rates of the two country to obtain: rd£ = (1+ rdDM)*1.043 /1.04 = (1+ rdDM)*1.00288 - 1The total outstanding debt by country is indicated in table 6 of the case, we use the market value of unspecified (long-term) debt in our WACC calculations: US outstanding: Vd$ = 3,137 +152+110 (Market values) = 3,399 MVps$ = 11.0 (Market value of outstanding preference shares)UK outstanding: Vd£ = 1,794.8+87+63 (Market values) = £1...... middle of paper. .....investing in the company's stock even riskier.Exhibit 1.Exhibit 2.Cost of debt 8.63% 62% 3.48%Cost of equity 15.59% 38% 5.92 %WACC 9.40% Assumed growth 4.80% Before tax for 1991 963.00 Post tax for 1991 625.95 Final value after 1991 14,252.91 Value of equity 14,878.86 Shares outstanding 1,005,896,041 Calculated price per share $14.792 Actual price per share $9.480 Undervalued price 35.91% Exhibit 3 Stock Goodwill / Growth Rate Equity Value 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%