Essay about Heinz

2244 Words Jan 20th, 2014 9 Pages
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
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In terms of the Market Risk Premium and Beta, we elected to use the most long-term estimates available since these provide the most accurate representation of the market by avoiding a bias to more current market fluctuations. To calculate the cost of debt, the yield to maturity (YTM) of the two bonds given in exhibit 3 of the case (Appendix 1). The average of the two bonds was taken since the case indicated that these were representative of the company’s outstanding borrowings, and thus the assumption was made that each bond represented 50% of the company’s debt.
The Value of Equity was calculated based on the market value of the outstanding shares of Heinz. However, similar data on market value for the firm’s Value of Debt was not provided, and as a proxy the sum of the book values of the debt as described in Table 1 was used.
Based on these assumptions, we believe the best estimate for H.J. Heinz’s WACC is 7.51% (Appendix 2). While we believe this WACC gives the most accurate picture of the company, we recognize that the numerous assumptions we made directly impact the final output. Therefore, we elected to conduct sensitivity checks around certain assumptions that lend themselves to variability. Based on…