A. Let's start with a simple calculation to set the stage for our analysis. Suppose you wish to 
estimate the value of Heinz by means of a perpetuity (i.e., assume that the free cash flows of 
the last year continue forever, at the current cost of capital). 
1) Calculate the growth rate of gross profit for the years given in Exhibit 1. (You can determine 
that for 2 years; average those. Round to the nearest quarter of a percent). 
Assume that the free cash flows can be based on net income for 2010, with depreciation being 
225 million, and capital expenditures 312 million. Net working capital decreased by 2 million.
2) Calculate the perpetuity using your growth rate from step A1, and a cost of capital of 7%. 
Repeat for growth rates 0.75% higher and 0.75% lower than your estimate, and cost of capital 
of 4%, 5%, 6%, 8% and 9%. Show all combinations, make a table with the values of the 
perpetuity.
3) Explain why, as in step A1, it might be a good idea to base the growth rate on gross profit
rather than on the growth rate of net income (which could be calculated in the same way, 
with the same table)