Estimating Cost of Capital in Uncertain Times

2035 Words Apr 20th, 2015 9 Pages
H.J. HEINZ: ESTIMATING COST OF
CAPITAL IN UNCERTAIN TIMES
Case Analysis
San Ramon Section I (Early Class)
05/23/2014

Animesh Dalakoti
Kimberly Donellan
Mark Garcia
Priit Newlin
Kevin Stupfel

Case Summary:
In this case study, we estimate the weighted average cost of capital (WACC) for H. J. Heinz Company by analyzing its financial conditions as well as macroeconomic variables post 2007-2009 recession years. H. J. Heinz also known, as Heinz in the consumer market, is a US based food giant with billions of dollars in yearly revenue. It is a major player in the ketchup and sauces, infant and nutrition, and meals and snacks market. The three primary competitors for Heinz Company are Kraft Foods, Campbell Soup Company, and Del Monte Food
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b) Market risk premium
The market risk premium is defined as the excess return on the expected market return compared to the risk free rate. In the Heinz case, the market risk premium varies from 5% to 9% with 7.5% being the long term average.
The reason for various options for market risk premium is the uncertain times and post recession era in which the excess market returns were different than the historical average. While calculating the WACC, we have used multiple values of market risk premium to calculate a range of WACC, and have analyzed the appropriate value later in this report.
Based on the beta, the market risk premium, and the risk free rate, we now calculate the cost of equity by using the formula Rs = Rf + Beta * (Market Risk Premium) as shown in Table 4A. The cost of equity varies from 6.49% to
8.73% based on the market premium range with 7.89% being the average at 7.5% market risk premium.
Beta
(Regression analysis) (Beta)

0.56

Risk Free Rate (Rs)

3.69%

Market Risk Premium (Mp) 5%

Cost of Equity (Rf + Beta * Mp) 6.49%

6%

7.05%

7.5% 9% Table 4A: Market Risk Premium vs. Cost of Equity

7.89% (Rs) 8.73%

III. Cost of Debt
Heinz company finances its projects based on certain
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