3. 3) For both years, calculate a range of estimates for the cost of capital (WACC) for Heinz. Be sure to note your inputs and explain your choices, as needed. Where within this range do you believe Heinz most likely falls, and why? 4. 4) Calculate the WACC for the comparable companies given. Why might the information from comparable be useful in informing vour opinion for a WACC for Heinz? Why not? Case Analysis: H.J. Heinz A spreadsheet supplement is available on Canvas. Most calculations, and explanations of calculations, can be provided as exhibits to your writeup. Please remember to post only PDF files to Canvas. Please write your case group number of the first page of your paper. Please prepare the following in your writeup. It is also helpful to have a copy with you during class to be able to participate in our discussion. Kraft foods: Debt = 18,990 Million Equity (market value) = 1735*29.90 = 51,876.5 Million Total capital = 18990 + 51876.5 = 70,866.5 Million Weight of debt = 18,990/70866.5 = 0.2680 Weight of equity = 1-0.2680 = 0.7320 Cost of equity = Rf + beta*(Rm-Rf) Beta = 0.65 Rf = risk free rate = 3% (latest T-bill rate form Yahoo Finance) rm = market return = 10% (historical equity index return) Cost of equity = 3 + 0.65*(10-3) = 7.55% Cost of debt = 5.12% (given) Assuming tax rate of 35%, after tax cost of debt = 5.12%*(1-0.35) = 3.328% WACC = 0.2680*3.328 +0.7320*7.55 = 6.42% WACC for Kraft food = 6.42% Campbell soup: Weight of debt = 0.1686 Weight of equity =0.8314 Cost of equity = 3 +0.55*(10-3) = 6.85% Cost of debt after tax = 4.36*(1-0.35) = 2.834% WACC = 0.1686*6.85% + 0.8314*2.834% = 6.17% WACC for Campbell soup = 6.17% Del monte: Weight of debt = 0.3193 Weight of equity = 0.6807 Cost of equity = 7.9% after tax cost of debt = 4.0234% WACC = 0.3193*4.0234 + 0.6807*7.9% = 6.66% WACC for Del Monte = 6.66% Best estimate of WACC for Kraft would be average of these three = (6.66 +6.17 + 6.42)/3 = 6.42% Best estimate of WACC for Kraft = 6.42% Exhibit 1 H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Income Statement (numbers in thousands except per-share amounts; fiscal year ends in April) 2010 Revenue Costs of goods sold Gross profit 2008 9,885,556 6,233,420 3,652,136 2009 10,011,331 6,442,075 3,569,256 10,494,983 6,700,677 3,794,306 SG&A expense 2,081,801 1,570,335 2,066,810 1,502,446 2,235,078 1,559,228 Iperating income Interest expense ther income (expense) Income before taxes 323,289 (16,283) 1,230,763 275,485 92,922 1,319,883 250,574 (18,200) 1,290,454 Income taxes Vet income after taxes 372,587 858,176 375,483 944,400 358,514 931,940 Adjustments to net income Vet income (13,251) 844,925 (21,328) 923,072 (67,048) 864,892 2.61 2.89 2.71 Diluted EPS Dividends per share 1.52 1.66 1.68 Data source: H. J. Heinz SEC filings, 200810. H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Balance Sheet (numbers in thousands of dollars except per-share amounts; fiscal year ends in April) 2008 2009 Cash Net receivables Inventories Other current assets Total current assets 617,687 1,161,481 1,378,216 168,182 3,325,566 373,145 1,171,797 1,237,613 162,466 2,945,021 2010 483,253 1,045,338 1,249,127 273,407 3,051,125 Net fixed assets Other noncurrent assets Total assets 2,104,713 5,134,764 10,565,043 1,978,302 4,740,861 9,664,184 2,091,796 4,932,790 10,075,711 Accounts payable Short-term debt Current portion of long-term debt Other current liabilities Total current liabilities 1,247,479 124,290 328,418 969,873 2,670,060 1,113,307 61,297 4,341 883,901 2,062,846 1,129,514 43,853 15,167 986,825 2,175,359 Long-term debt Other noncurrent liabilities 4,730,946 1,276,217 6,007,163 5,076,186 1,246,047 6,322,233 4,559,152 1,392,704 5,951,856 Equity Total liabilities and equity 1,887,820 10,565,043 1,279,105 9,664,184 1,948,496 10,075,711 Shares outstanding (in millions of dollars) 311.45 314.86 317.69 Exhibit 3 H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Capital Market Data (yields and prices as of the last trading day in April of the year indicated) Average Historic Yields 2008 2009 1-year 5-year 10-year 30-year) Moody's Aaa Moody's Baa 3-month commercial paper 2003 1.22% 2.85% 3.89% 4.79% 5.53% 6.65% 1.21% 2004 1.55% 3.63% 4.53% 5.31% 5.87% 6.58% 1.08% 2005 3.33% 3.90% 4.21% 4.61% 5.21% 5.97% 2.97% 2006 4.98% 4.92% 5.07% 5.17% 5.95% 6.74% 4.90% 2007 4.89% 4.51% 4.63% 4.89% 5.40% 6.31% 5.22% 1.85% 3.03% 3.77% 4.49% 5.51% 6.87% 1.91% 0.49% 2.02% 3.16% 4.05% 5.45% 8.24% 0.22% 2010 0.41% 2.43% 3.69% 4.53% 5.13% 6.07% 0.24% Heinz Capital Market Prices of Typical Issues 2010 Heinz stock price Bond price: 6.750% coupon, semiannual bond due 3/15/32 (Baa rated) Bond price: 6.625% coupon, semiannual bond due 10/15/12 (Baa rated) 2009 $34.42 91.4 116.5 $46.87 116.9 113.7 (1) The 20-year yield is used for 200305, when the 30-year was not issued. Note that bond data were slightly modified for teaching purposes. Data sources: Federal Reserve, Value Line, Morningstar, and case writer estimates. Exhibit 4 H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Comparable Firm Data Campbell Soup Del Monte Kraft Financial Summary Revenues (in millions of dollars) Book value of equity (in millions of dollars) Book value of debt (in millions of dollars) 40,386 25,972 18,990 7,589 728 2,624 3,739 1,827 1,290 Market Data Beta Shares outstanding (in millions of dollars) Share price (dollars as of close April 30, 2010) Typical Standard & Poor's bond rating Representative yield on long-term debt 0.65 1,735 29.90 BBB- 5.12% 0.55 363 35.64 A 4.36% 0.70 182 15.11 BB 6.19% Data sources: Value Line; H. J. Heinz SEC filings, 200810; case writer estimates; Morningstar. 3. 3) For both years, calculate a range of estimates for the cost of capital (WACC) for Heinz. Be sure to note your inputs and explain your choices, as needed. Where within this range do you believe Heinz most likely falls, and why? 4. 4) Calculate the WACC for the comparable companies given. Why might the information from comparable be useful in informing vour opinion for a WACC for Heinz? Why not? Case Analysis: H.J. Heinz A spreadsheet supplement is available on Canvas. Most calculations, and explanations of calculations, can be provided as exhibits to your writeup. Please remember to post only PDF files to Canvas. Please write your case group number of the first page of your paper. Please prepare the following in your writeup. It is also helpful to have a copy with you during class to be able to participate in our discussion. Kraft foods: Debt = 18,990 Million Equity (market value) = 1735*29.90 = 51,876.5 Million Total capital = 18990 + 51876.5 = 70,866.5 Million Weight of debt = 18,990/70866.5 = 0.2680 Weight of equity = 1-0.2680 = 0.7320 Cost of equity = Rf + beta*(Rm-Rf) Beta = 0.65 Rf = risk free rate = 3% (latest T-bill rate form Yahoo Finance) rm = market return = 10% (historical equity index return) Cost of equity = 3 + 0.65*(10-3) = 7.55% Cost of debt = 5.12% (given) Assuming tax rate of 35%, after tax cost of debt = 5.12%*(1-0.35) = 3.328% WACC = 0.2680*3.328 +0.7320*7.55 = 6.42% WACC for Kraft food = 6.42% Campbell soup: Weight of debt = 0.1686 Weight of equity =0.8314 Cost of equity = 3 +0.55*(10-3) = 6.85% Cost of debt after tax = 4.36*(1-0.35) = 2.834% WACC = 0.1686*6.85% + 0.8314*2.834% = 6.17% WACC for Campbell soup = 6.17% Del monte: Weight of debt = 0.3193 Weight of equity = 0.6807 Cost of equity = 7.9% after tax cost of debt = 4.0234% WACC = 0.3193*4.0234 + 0.6807*7.9% = 6.66% WACC for Del Monte = 6.66% Best estimate of WACC for Kraft would be average of these three = (6.66 +6.17 + 6.42)/3 = 6.42% Best estimate of WACC for Kraft = 6.42% Exhibit 1 H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Income Statement (numbers in thousands except per-share amounts; fiscal year ends in April) 2010 Revenue Costs of goods sold Gross profit 2008 9,885,556 6,233,420 3,652,136 2009 10,011,331 6,442,075 3,569,256 10,494,983 6,700,677 3,794,306 SG&A expense 2,081,801 1,570,335 2,066,810 1,502,446 2,235,078 1,559,228 Iperating income Interest expense ther income (expense) Income before taxes 323,289 (16,283) 1,230,763 275,485 92,922 1,319,883 250,574 (18,200) 1,290,454 Income taxes Vet income after taxes 372,587 858,176 375,483 944,400 358,514 931,940 Adjustments to net income Vet income (13,251) 844,925 (21,328) 923,072 (67,048) 864,892 2.61 2.89 2.71 Diluted EPS Dividends per share 1.52 1.66 1.68 Data source: H. J. Heinz SEC filings, 200810. H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Balance Sheet (numbers in thousands of dollars except per-share amounts; fiscal year ends in April) 2008 2009 Cash Net receivables Inventories Other current assets Total current assets 617,687 1,161,481 1,378,216 168,182 3,325,566 373,145 1,171,797 1,237,613 162,466 2,945,021 2010 483,253 1,045,338 1,249,127 273,407 3,051,125 Net fixed assets Other noncurrent assets Total assets 2,104,713 5,134,764 10,565,043 1,978,302 4,740,861 9,664,184 2,091,796 4,932,790 10,075,711 Accounts payable Short-term debt Current portion of long-term debt Other current liabilities Total current liabilities 1,247,479 124,290 328,418 969,873 2,670,060 1,113,307 61,297 4,341 883,901 2,062,846 1,129,514 43,853 15,167 986,825 2,175,359 Long-term debt Other noncurrent liabilities 4,730,946 1,276,217 6,007,163 5,076,186 1,246,047 6,322,233 4,559,152 1,392,704 5,951,856 Equity Total liabilities and equity 1,887,820 10,565,043 1,279,105 9,664,184 1,948,496 10,075,711 Shares outstanding (in millions of dollars) 311.45 314.86 317.69 Exhibit 3 H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Capital Market Data (yields and prices as of the last trading day in April of the year indicated) Average Historic Yields 2008 2009 1-year 5-year 10-year 30-year) Moody's Aaa Moody's Baa 3-month commercial paper 2003 1.22% 2.85% 3.89% 4.79% 5.53% 6.65% 1.21% 2004 1.55% 3.63% 4.53% 5.31% 5.87% 6.58% 1.08% 2005 3.33% 3.90% 4.21% 4.61% 5.21% 5.97% 2.97% 2006 4.98% 4.92% 5.07% 5.17% 5.95% 6.74% 4.90% 2007 4.89% 4.51% 4.63% 4.89% 5.40% 6.31% 5.22% 1.85% 3.03% 3.77% 4.49% 5.51% 6.87% 1.91% 0.49% 2.02% 3.16% 4.05% 5.45% 8.24% 0.22% 2010 0.41% 2.43% 3.69% 4.53% 5.13% 6.07% 0.24% Heinz Capital Market Prices of Typical Issues 2010 Heinz stock price Bond price: 6.750% coupon, semiannual bond due 3/15/32 (Baa rated) Bond price: 6.625% coupon, semiannual bond due 10/15/12 (Baa rated) 2009 $34.42 91.4 116.5 $46.87 116.9 113.7 (1) The 20-year yield is used for 200305, when the 30-year was not issued. Note that bond data were slightly modified for teaching purposes. Data sources: Federal Reserve, Value Line, Morningstar, and case writer estimates. Exhibit 4 H. J. HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Comparable Firm Data Campbell Soup Del Monte Kraft Financial Summary Revenues (in millions of dollars) Book value of equity (in millions of dollars) Book value of debt (in millions of dollars) 40,386 25,972 18,990 7,589 728 2,624 3,739 1,827 1,290 Market Data Beta Shares outstanding (in millions of dollars) Share price (dollars as of close April 30, 2010) Typical Standard & Poor's bond rating Representative yield on long-term debt 0.65 1,735 29.90 BBB- 5.12% 0.55 363 35.64 A 4.36% 0.70 182 15.11 BB 6.19% Data sources: Value Line; H. J. Heinz SEC filings, 200810; case writer estimates; Morningstar