Essay about Heinz: Estimating the Cost of Capital

The cost equity was determined using the CAPM approach. Looking at the last 78 years, the historical S&P market returns would suggest using a 10.5% to 11.0% rate to project future returns. The average industry revenue growth rate in footwear is 10%. However, to be more conservative, a market return rate of 8% was used. The risk free rate was determined to be 4.69% using the 10 year US Treasury Bills yield given in the case footnotes on page 7 of the case. This results in a market risk premium of 3.31%. The cost of equity was determined to be 12.80% (Risk free rate + Beta x Market Risk Premium) (See Exhibit 1).

The cost of equity is the theoretical return that equity investors expect or receive from the company for investing their funds in the company. The risk free rate that is the Government Treasury bill rate is 3.1%, the market risk premium is 7% and the beta has been calculated as

Compute the cost of common equity using the CAPM model. For beta, use the average beta of three selected competitors. You may obtain the betas from Yahoo Finance. Assume the risk free rate to be 3% and the market risk premium to be 4%.

* Stock Beta: Exhibit 5 shows a detailed measurement of the company’s stock returns in relation to the rest of the market through 5-year historical price and index data. The analysis includes monthly returns of both the NYSE and the S&P 500 index in order to capture a comprehensive view of the market return. In each comparison, the monthly returns of the Target stock and market are plotted on Y-axis and X-axis respectively to get the regression line’s slope or beta. The analysis arrives at an average beta of 0.988 which indicates a similar movement of Target stock’s returns in comparison to the whole market over time.

Two managers attending an executive education course attempt to develop a cost of capital estimate for a leading telecommunications company, Telus The two managers are somewhat confused about the costs of various sources of capital, the calculation of the overall cost of capital and the appropriate use of the hurdle rate

Cost of Equity = Risk free rate + (Market return – risk free rate) X beta

The Equity beta for the whole company and for the commercial division is calculated in the appendix.

The Kraft Heinz Business Purpose Analysis There is one thing that is guaranteed in life and in business that is change. The one thing companies can count on change is consistently taking place and companies must identify, manage monitor and control change. For instance, change is consistently taking place in the target markets, the industries, and business in general. For the business to be successful and survive despite the constant changes, companies must perform business analysis. As a result, business analytics is an important aspect of businesses like The Kraft Heinz Company (Kraft Heinz).

Amongst General Mills’ competitors in the packaged foods and meats stock-market industry, General Mills has the lowest beta. Accordingly, since General Mills’ beta is below 1.0, the potential purchase of General Mills’ stocks acknowledges that the stock prices does not tend to change due to external factors in the stock market overall. Vice versa, if General Mills’ beta is above 1.0, stockholders experience the tendency of how external factors regarding the stock market possibly affects General Mills’ stock prices at any moment. Consequently, companies who have a beta above 1.0, is likely to be more risker if stockholders consider purchasing General Mills’ stocks.

The CEO of the company is optimistic that the rate of return is greater than the cost of investments. However, it will be difficult to continue with the project without agreeing on the estimate of the cost of capital. Determining the company’s cost of capital is essential for both

The analysis of this paper will derive the validity of the Fama and French (FF) model and the efficiency of the Capital Asset Pricing Model (CAPM). The comparison of the Fama and French Model and CAPM (Sharpe, 1964 & Lintner, 1965) uses real time data of stock market to practise its efficacy. The implication of the function in realistic conditions would justify the utility of the CAPM theory. The theory suggests that the expected return demanded by investors on a risky asset depends on the risk-free rate of interest, the expected return on the market portfolio, the variance of the return on the market portfolio, and

This case study focuses on where financial theory ends and practical application of the weighted average cost of capital (WACC) begins. It presents evidence on how some of the most financially complex companies and financial advisors estimated capital costs and focuses on the gaps found between theory and application. The approach taken in the paper differed from their predecessors in several various respects. Prior published information was solely based on written, closed-end surveys sent to a large number of firms, without a focused topic. The study set out to see if financial theory, specifically cost-of-capital, is truly ubiquitous in true business applications.

The TVM is an important characteristic of any FA. Arguably, this financial concept is the most important as it is essential for managers to understand the TVM’s power on stock prices (Ehrhardt & Brigham, 2017). In short, TVM states that today’s dollar in the bank has more value than a reliable promise or expectation of obtaining a future dollar (Magloff, n.d.). The ensuing sections shall discuss: (1) propose various present values* (PV) of the Company; (2) the possible implications of risk* on the PV; (3) the Company’s future

Different models are available when determining the discount factor of a company or most any-other security, the most common of which are based on the Capital Asset Pricing Model. First published in 1946 “The Capital Asset Pricing Model”, (CAPM), by William F.Sharpe, described as the “centrepiece of modern financial economics.” is the first model to quantitatively represent the compensation an investor would require for both the time value of the money invested and the level of systematic risk exposure, using a simple yet elegant equation to represent the relationship between required returns and standard deviation. The CAPM is built on the earlier work of Harry Markowitz PAPER NAME AND DATE on diversification and modern portfolio theory, when combined the two theories act as the baes of modern portfolio constructions, with Markovitz measuring risk and how diversification affects risk and CAPM assessing the required rate of return.

We use the Capital Asset Pricing Model (CAPM) to determine the cost of equity. As