Case:

H$.$J$.$ Heinz: Estimating Cost of Capital in Uncertain Times Market Rate Premium Risk free rate Beta expected rate of return $7\mathrm{.}50\%4\mathrm{.}53\%0\mathrm{.}629\mathrm{.}41\%4,59\%+((0\mathrm{.}65)(7\mathrm{.}5\%))$

$2009$ Income Before Taxes $1,319,883\mathrm{.}00$

Income Taxes $375483\mathrm{.}00$ Tax Rate $28\mathrm{.}45\%$ Equity $1,279,105\mathrm{.}00$

Long$-$term Debt $5\mathrm{.}076,186\mathrm{.}00$

Long$-$term Debt $+$ Equity $6,355\mathrm{.}291\mathrm{.}00$

Weight of Equity $20\mathrm{.}13\%$

Weight of Debt $79\mathrm{.}87\%$

Cost of Equity $9\mathrm{.}18\%$ Shares outstanding $($millions$)314\mathrm{.}860$ stock price $ $34\mathrm{.}00$

Cost of Debt $3\mathrm{.}88\%$ WACC $20101\mathrm{.}290,454\mathrm{.}00358,514,0027\mathrm{.}78\%1\mathrm{.}948\mathrm{.}496\mathrm{.}004,559,152\mathrm{.}006,507\mathrm{.}648\mathrm{.}0029\mathrm{.}94\%70\mathrm{.}06\%9\mathrm{.}18\%317\mathrm{.}69047\mathrm{.}003\mathrm{.}97\%$

HJ$.$ HEINZ: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES Income Statement $($numbers in thousands except per$-$share amounts, fiscal year ends in April$)200920092010$

Revenue $988555610,073310010494983$ Costs of goods sold $623342064420756,700677$

Gross profit $3\mathrm{.}6521263,569,2563,794306$ SGSA expense $2,081,8012066,8102\mathrm{.}235078$

Operating income $157033515024461559,228$ Interest expense $323,289275,485250,574$

Other income $($expense$)-16\mathrm{.}28392\mathrm{.}922-18200$ income before taxes $1230,7631319,8831290\mathrm{.}454372587$ Income taxes $358514375,483$ B$58\mathrm{.}126944,4931\mathrm{.}940$

Net income after taxes $-2112$B $-13251-67048$

Adjustments to net income $844\mathrm{.}925923072164,892$

Net income Diluted EPS $1\mathrm{.}52$ Dividends per share HJ HEINZ ESTIMATING THE COST OK CAPITAL IN UNCERTAIN TIMES

Balance Sheet $($numbers in thousands except per$-$share amounts, fiscal year ends in April$)20092010$

Cash $372145483353$

Net receivables $177971045\mathrm{.}338$

Inventories $1,337,6131,349,127$

Other current assets $162466273407$ Total current assets $2,945,0213\mathrm{.}051125$

Net fixed assets $1978,3022091,7\%$

Other noncurrent assets $4,740,8614,932,790$

Total assets $9\mathrm{.}664,18410\mathrm{.}075,711$

Accounts payable $1113,3071129,514$

Short$-$term debt $6139743853$

Current portion of long$-$term debt $15,167$

Other current liabilities $882901986825$

Total current liabilities $20628462175359$

Long$-$term debt $5\mathrm{.}0761864359,152$

Other noncurrent liabilities $134604739270463223335951856$

Equity $13791051948496$

Total liabilities and equity $966418610\mathrm{.}075,711$

Shares outstanding millions$)314863176943412612\mathrm{.}892\mathrm{.}71166168$

Competitive WACC Calculation

WACC $(100-$Equity$/$Total Long$-$Term Debt$)$

Required Return $(1-$T$)+$Equity$/$Long$-$Term Debt$)$

Required Return on Equity Kraft: Rs $=5\mathrm{.}12\%$ Wd $=36\mathrm{.}77\%$ We $=63\mathrm{.}23\%$

Assume Similar Tax Rate to Heinz $=28\%$ WACC: $36\mathrm{.}77*5\mathrm{.}12*(1-28\%)+63\mathrm{.}23*5\mathrm{.}12\%=1\mathrm{.}36\%+3\mathrm{.}24\%=4\mathrm{.}6\%$

Campbell Soup: Rs $=4\mathrm{.}36\%$ Wd $=72\mathrm{.}26\%$ We $=27\mathrm{.}74$

Assume Similar Tax Rate to Heinz $=28\%$ WACC: $72\mathrm{.}26\%*4\mathrm{.}36*(1-28\%)+27\mathrm{.}74\%*4\mathrm{.}36=2\mathrm{.}27\%+1\mathrm{.}21\%=3\mathrm{.}48\%$

Del Monte: Rs $=6\mathrm{.}19\%$ Wd $-41\mathrm{.}63\%$ We $=58\mathrm{.}37\%$

Assume Similar Tax Rate to Heinz $=28\%$ WACC: $41\mathrm{.}63\%*6\mathrm{.}19\%*(1-28\%)+58\mathrm{.}37\%*6\mathrm{.}19\%=1\mathrm{.}86\%+3\mathrm{.}61\%=5\mathrm{.}47\%$

Campbell Del Monte Kraft Soup Financial Summary Revenues $($millions$)$ Book value of equity $($millions$)$ Book value of debt $($millions$)40,38625\mathrm{.}97218\mathrm{.}9907,5897283\mathrm{.}7391,8271\mathrm{.}2902,6240\mathrm{.}72$

Market Data Beta Shares outstanding $($millions$)$ Share price $($dollars as of close April $30,2010)$

Typical Standard & Poor's bond rating Representative yield on long$-$term debt $0\mathrm{.}5873529\mathrm{.}90$ BBB$-0\mathrm{.}3236335\mathrm{.}6418215\mathrm{.}11$ BB $6\mathrm{.}19\%4\mathrm{.}36\%$

Questions:

What changes can be made to the cost of capital recommendations?

What is the rationale for the changes identified?