H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES

The report that follows endeavors to determine an appropriate Weighted Average Cost of Capital (WACC) for the H. J. Heinz Company at the end of the 2010 fiscal year. Further, the report attempts to provide reasonable explanations for the decisions and assumptions that were made throughout the required calculations, specifically around the firm’s capital structure, cost of debt and cost of equity. Finally, the report offers an opinion on the validity of the derived WACC figure and the role it could potentially play in the decision making process at H. J. Heinz.

The Capital Structure
Arriving at an appropriate capital structure upon which to base the WACC calculation is a foundational undertaking because the structure represents the basis from which the other relevant proportions are drawn.
Figure 1 presents the Liability and Equity sections from the fiscal 2008, 2009 and 2010 H. J. Heinz balance sheets.

| 2008 | 2009 | 2010 | | | | | Accounts payable | 1,247,479 | 1,113,307 | 1,129,514 | Short-term debt | 124,290 | 61,297 | 43,853 | Current portion of long-term debt | 328,418 | 4,341 | 15,167 | Other current liabilities | 969,873 | 883,901 | 986,825 | Total current liabilities | 2,670,060 | 2,062,846 | 2,175,359 | | | | | Long-term debt | 4,730,946 | 5,076,186 | 4,559,152 | Other noncurrent liabilities | 1,276,217 | 1,246,047 | 1,392,704 | | 6,007,163 | 6,322,233 | 5,951,856 | | | | | Equity | 1,887,820 | 1,279,105 | 1,948,496 | Total liabilities and equity | 10,565,043 | 9,664,184 | 10,075,711 |

Figure 1

Beginning the capital structure discussion by examining the debt component, the first critical decision we arrive it is which debt amounts are appropriate to include in the calculation. Relying first on