Case 12 H. J. Heinz: Estimating the Cost of Capital in Uncertain Times 193 EXHIBIT 12.1 Income Statement (numbers in thousands except per-share amounts: fiscal year ends in April) 2008 2009 2010 Revenue 9,885,556 10,011,331 10,494,983 Costs of goods sold 6,233,420 6,442,075 6,700,677 Gross profit 3,652,136 3,569,256 3,794,306 SG&A expense 2,081,801 2,066,810 2,235,078 Operating income 1,570,335 1,502,446 1,559,228 Interest expense 323,289 275,485 250,574 Other income (expense) (16,283) 92,922 (18,200) Income before taxes 1,230,763 1,319,883 1,290,454 Income taxes 372,587 375,483 358,514 Net income after taxes 858,176 944,400 931,940. Adjustments to net income (13,251) (21,328) (67,048) Net income 844.925 923,072 864,892 Diluted EPS 2.61 2.89 2.71 Dividends per share 1.52 1.66 1.68 Data source: H. J. Heinz SEC filings, 2008-10. 194 Part Three Estimating the Cost of EXHIBIT 12.2 Balance Sheet (numbers in thousands except per-share amounts; fiscal year ends in April) 2008 2009 2010 Cash 617,687 373,145 483,253 Net receivables 1,161,481 1.171.797 1,045,338 Inventories 1,378,216 1,237,613 1,249,127 Other current assets 168,182 162,466 273,407 Total current assets 3,325,566 2,945,021 3,051,125 Net fixed assets 2,104,713 1,978,302 2,091,796 Other noncurrent assets 5,134,764 4,740,861 4,932,790 Total assets 10,565,043 9,664,184 10,075,711 Accounts payable 1,247,479 1,113,307 1,129,514 Short-term debt 124,290 61,297 43,853 Current portion of long-term debt 328,418 4,341 15,167 Other current liabilities 969,873 883,901 986,825 Total current liabilities 2,670,060 2,062,846 2,175,359 Long-term debt 4,730,946 5,076,186 4,559,152 Other noncurrent liabilities 1,276,217 1,246,047 1,392,704 6,007,163 6,322,233 5,951,856 Equity 1,887,820 1,279,105 Total liabilities and equity 1,948,496 10,565,043 9,664,184 10,075,711 Shares outstanding 311.45 (in millions of dollars) 314.86 317.69 Data source: H. J. Heinz SEC filings, 2008-10. EXHIBIT 12.3 Capital Market Data (yields and prices as of the last trading day in April of the year indicated) Average Historic Yields 1-year 5-year 2003 2004 2005 2006 2007 2008 2009 2010 1.22% 1.55% 3.33% 4.98% 4.89% 1.85% 0.49% 0.41% 2.85% 3.63% 3.90% 4.92% 4.51% 3.03% 2.02% 2.43% 10-year 3.89% 4.53% 4.21% 5.07% 4.63% 3.77% 3.16% 3.69% 30-year 4.79% 5.31% 4.61% 5.17 % 4.89% 4.49% 4.05% 4.53% Moody's Aaa 5.53% 5.87% 5.21% 5.95% 5.40% 5.51% 5.45% 5.13% Moody's Baa 6.65% 6.58% 5.97% 6.74% 6.31% 6.87% 8.24% 6.07% 3-month commercial paper 1.21% 1.08% 2.97% 4.90% 5.22% 1.91% 0.22% 0.24% Heinz Capital Market Prices of Typical Issues 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) Note that bond data were slightly modified for teaching purposes. Data sources: Federal Reserve, Value Line, Morningstar, and case writer estimates. 'The 20-year yield is used for 2003-05, when the 30-year was not issued. 2009 2010 $34.42 $46.87 91.4 116.9 116.5 113.7 EXHIBIT 12.4 | Comparable Firm Data Kraft Campbell Soup Del Monte Financial Summary Revenues (in millions of dollars) 40,386 7,589 3,739 Book value of equity (in millions of dollars) 25,972 728 1,827 Book value of debt (in millions of dollars) 18,990 2,624 1,290 Market Data Beta 0.65 0.55 0.70 Shares outstanding (in millions of dollars) 1,735 363 182 Share price (dollars as of close April 30, 2010) 29.90 35.64 Typical Standard & Poor's bond rating BBB- A Representative yield on long-term debt 5.12% 4.36% 15.11 BB 6.19% Data cou 535 fx A B C D F G H 3 Component Weights 4 EQUITY 5 Shares outstanding (in millions) Exhibit 12.2 314.86 317.69 6 Share price Exhibit 12.3 1735 29.90 363 182 Exhibit 12.4 35.64 15.11 Exhibit 12.4 7 Market Value of Equity Calculate Calculate 8 Equity as % of total capital (row 17) Calculate Calculate 9 10 DEBT 11 Short-term debt 12 Current portion of LTD 13 Long-term debt 14 Book value of debt 15 Debt as % of total capital (row 17) 16 17 TOTAL CAPITAL (BV DEBT+ MV EQUITY) 18 19 Component Costs 20 COST OF EQUITY 21 Beta 22 Market Risk Premium (Rm-R) 23 Risk-free rate (R) 24 Cost of Equity 25 26 COST OF DEBT 27 Standard & Poor's bond rating 28 Yield on long-term debt 29 Tax rate 30. 31 WACC Exhibit 12.2 61,297 43,853 Exhibit 12.2 4,341 15,167 Exhibit 12.2 5,076,186 4,559,152 Total Calculate Total 18,990 2,624 1,290 Exhibit 12.4 Calculate Total p. 192/note 5 0.54 0.65 0.55 Case, p. 192 0.70 Exhibit 12.4 Exhibit 12.4 Exhibit 12.3 Calculate Exhibit 12.4 Calculate Exhibit 12.3 Baa Baal Exhibit 12.3 Given 30.00% 30.00% BBB- 5.12% 30.00% A 4.36% 30.00% BB Exhibit 12.4 6.19% 30.00% Given Exhibit 12.4 Calculate Calculate 32 33 34 Contents Exhibit 1 Exhibit 2 Exhibit 3 Exhibit 4 Worksheet for WACC Comps Figure 1