H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES
H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES
Heinz is an established processed food manufacturing giant, with $10 billion in revenues and 29,600 employees around the globe. Heinz operates in over 200 countries. The company is organized into business segments based on regions: North American consumer products, Europe Foodservice, Asia Pacific and the rest of the world. Around 60% of the company revenues were from outside United States and the company is increasingly focusing on emerging markets, which have generated 30% of recent growth and 15% of total sales.
With continued uncertainty following the recession in late 2007, Heinz has seen volatility in stocks and finding it difficult to maintain growth in sales. Because of uncertainty in the market, company wanted to recalculate its weighted average cost of capital, which would reflect the current conditions of economy and help the company make right capital budgeting decisions on its future projects and investment opportunities.
Heinz’s Cost of Debt:
Recent markets had seen unusually low borrowing costs due to turmoil in financial market. Heinz has two outstanding bonds and we calculated the cost of borrowing by using YTM (Yield to Maturity) at 5.37%. See Exhibit 1 for Cost of Debt.
Heinz’s competitors also have a reasonably similar borrowing costs and variability seen by financial conditions in near term does not show significant change in borrowing costs. ( ?? Need to check this ???)
Heinz’s Cost of Equity: See Exhibit 2 for details of Cost of Equity
We calculated cost of equity capital by using the SML. Regression of the capital equity risk was performed and the various market beta’s were used based on ?
Rs = Rf + Beta x [ Rm – Rf ] Highest return noted was 7.29% ( = 3.69% + 0.72 * 5.3% ).
Because of the market risks, different values of Market risk premiums and Beta was considered (using regression).
Heinz’s WACC Calculation for a range with focus on Beta variation:
We
Heinz is an established processed food manufacturing giant, with $10 billion in revenues and 29,600 employees around the globe. Heinz operates in over 200 countries. The company is organized into business segments based on regions: North American consumer products, Europe Foodservice, Asia Pacific and the rest of the world. Around 60% of the company revenues were from outside United States and the company is increasingly focusing on emerging markets, which have generated 30% of recent growth and 15% of total sales.
With continued uncertainty following the recession in late 2007, Heinz has seen volatility in stocks and finding it difficult to maintain growth in sales. Because of uncertainty in the market, company wanted to recalculate its weighted average cost of capital, which would reflect the current conditions of economy and help the company make right capital budgeting decisions on its future projects and investment opportunities.
Heinz’s Cost of Debt:
Recent markets had seen unusually low borrowing costs due to turmoil in financial market. Heinz has two outstanding bonds and we calculated the cost of borrowing by using YTM (Yield to Maturity) at 5.37%. See Exhibit 1 for Cost of Debt.
Heinz’s competitors also have a reasonably similar borrowing costs and variability seen by financial conditions in near term does not show significant change in borrowing costs. ( ?? Need to check this ???)
Heinz’s Cost of Equity: See Exhibit 2 for details of Cost of Equity
We calculated cost of equity capital by using the SML. Regression of the capital equity risk was performed and the various market beta’s were used based on ?
Rs = Rf + Beta x [ Rm – Rf ] Highest return noted was 7.29% ( = 3.69% + 0.72 * 5.3% ).
Because of the market risks, different values of Market risk premiums and Beta was considered (using regression).
Heinz’s WACC Calculation for a range with focus on Beta variation:
We