# Harvard Management Company

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Case Study II
Weighted Average Cost of Capital

Company chosen in the S&P 500 : Name HEINZ
Ticker HNZ
Price 72.47
A. Estimating the proportion of debt D /D+E
Market capitalization = number of shares * share price = 320,650 millions*72.47 E = 23.24 billions

Working capital = Total current asset – Total current liabilities = 1234.275 millions
The working capital being positive, implies that all the cash and cash equivalent is considered as excess cash and should be deducted from the debt in the risk calculation.

In our case the trades payables are an integral part of doing business, and thus should be counted as a negative operating asset and not considered as debt.
Since other accounts payable are composed of derivatives products for hedging purposes, their main purpose is financial, and thus they have to be considered as debt.
The calculation we made to compute the debt is as follows:
= Total current liabilities + Total long-term debt and other non-current liabilities - Cash and cash equivalents - Trades payables
= 2647961 + 6410751 - 1330441 - 1202398
D = 11.5915 billions
The proportion of debt is then: D/D+E = 0.3328
B. Estimation of the cost of debt rD
According to the financial statement, the average interest rate for Debt and Financing Arrangements, which corresponds actually to long-term notes, was 4.28% for the fiscal year 2012. After that we wanted to estimate the cost of bonds. To do so we found the Heinz’s credit rating, which is BBB . We then looked at the future bonds that Heinz is going to issue, and decided to take the bond with a midterm maturity as representative debt of the company.
P=400 C=3.125% Price=101.4
Since the company is rated BBB, the default rate is d=0.4%.
We have found a y = 3.38% using the formula seen in the course.

To get the final rD we...

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