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Heinz

In: Business and Management

Submitted By thatsimba
Words 2250
Pages 9
At the time of the case (May 2010), H. J. Heinz was experiencing uncertain economic times. Most notably, this uncertainty manifested in discussion about the company’s weighted average cost of capital (WACC). This was an important discussion to have since the cost of capital greatly influenced how the company chose to invest, and stood to influence the company’s corporate strategies and competitiveness in the future.

The uncertainty of the times was significantly reflected in the company stock price over the period 2008 to 2010. Over this period, the price fluctuated from $47 at FYE 2008, down to $34 at FYE 2009 and back up to $47 at FYE 2010. Accordingly, Heinz was considering whether or not to adjust their cost of capital to reflect these changes as they occurred. This gives rise to two questions:

To what degree should these stock price changes affect cost of capital? How often should the cost of capital be re-estimated?

To address these questions, we first estimated Heinz’s WACC at the time under the given market conditions

In order to prepare our estimation for the WACC, we first made educated assumptions for the variable inputs of the WACC equation. Our assumptions and source behind each are as follows:

Table 1: The assumptions and corresponding source, used in the Heinz WACC estimation
Assumption Source
Risk Free Rate: 4.5 % Based on the 30-year Treasury Yield as of April 2010 (Exhibit 3 of case)
Market Risk Premium: 7.5% Based on long-term estimates (case, page 5)
Beta: 0.62 Based on 5 year average (case, page 5)
Cost of Equity: 9.18% Calculated using CAPM and above data
Cost of Debt: 3.16% Calculated using bond data (Exhibit 3)
Value of Equity: $14,890,130,300 Calculated based on share price of $46.87, multiplied by outstanding shares of 317.69 million (Exhibit 2)
Value of Debt: 4,559,152 In lieu of a market value, the book value of...

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