Mead Corporation: Cost of Capital

A business analyst at Mead Corporation had just begun the process of estimating Mead's cost of capital for the fourth quarter of 1990. As part of her analysis, she hoped to explain why the cost of equity had increased and recommend whether the company should consider the increase a problem. Excerpt UVA-F-0982 Rev. Sept 29, 2014 MEAD CORPORATION: COST OF CAPITAL On February 14, 1991, Cheryl Harris, business analyst at Mead Corporation, had just begun the process of estimating Mead's cost of capital for the fourth quarter of 1990. Like most other major corporations, Mead used its weighted-average cost of capital (WACC) to evaluate new investment proposals as well as to measure corporate and divisional performance. Mead was unique, however, in its practice of updating the hurdle rate every quarter and analyzing the factors responsible for its change. Looking back at the company's history of WACC estimates, Harris observed that Mead's cost of equity had been increasing relative to its cost of debt during the past few years. Hence, as part of her analysis, she hoped to explain why the cost of equity had increased and recommend whether the company should consider the increase a problem. But her more immediate concern was the presentation she was to give the next morning to William Enouen, Mead's CFO, who had asked to see Harris's WACC estimate. Mead Corporation Mead Corporation was founded in 1846 by Daniel E. Mead and incorporated in 1930. In the ensuing years, Mead grew to become a leading producer of paper and forest products. Included in the company's product line of forest derivatives were printing paper, writing paper, specialty paper, lumber, wood pulp, corrugated containers, and packaging products. The company also owned and operated a national distribution network for paper packaging and supplies. For beverage packages and packaging systems as well as for paper-based school and office supplies, Mead was the leading manufacturer in the United States. . . .