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 2003 2004 2005 2006 2007 2008 2009 2010 1-year 1.22% 1.55% 3.33% 4.98% 4.89% 1.85% 0.49% 0.41% 5-year 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-year1 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 2009 2010 Heinz stock price $34.42 $46.87 Bond price: 6.750% coupon, semiannual bond due 3/15/32 (Baa rated) 91.4 116.9 Bond price: 6.625% coupon, semiannual bond due 10/15/12 (Baa rated) 116.5 113.7 Note that bond data were slightly modified for teaching purposes. Data sources: Federal Reserve, Value Line, Morningstar, and case writer estimates.Cost of Capital Considerations Recessions certainly could wreak havoc on financial markets. Given that the recent downturn had been largely precipitated by turmoil in the capital markets, it was not surprising that the interest rate picture at the time was unusual Exhibit 3 presents information on interest rate yields. As of April 2010, short-term government rates and even commercial paper for those companies that could issue it were at strikingly low levels. Even long-term rates, which were typically less volatile, were low by historic standards. Credit spreads, which had drifted upwards during 2008 and jumped upwards during 2009, had settled down but were still somewhat high by historic standards. Interestingly, the low level of long-term rates had more than offset the rise in credit spreads, and borrowers with access to debt markets had low borrowing costs. Sheppard gathered some market data related to Heinz (also shown in Exhibit 3). He easily obtained historic stock price data. Most sources he accessed estimated the company's beta using the previous five years of data at about 0.65.5 Sheppard obtained prices for two bonds he considered representative of the company's outstanding borrowings: a note due in 2032 and a note due in 2012. Heinz had regularly accessed the commercial paper market in the past, but that market had recently dried up. Fortunately, the company had other sources for short-term borrowing and Sheppard estimated these funds cost about 1.20%. * Bary, the same article noted that Heinz had "an above-average portfolio of brands, led by its commanding global ketchup franchise" and, even at January 2009 prices, could be a takeover target. " Sheppard was sufficiently curious as to whether this number was still relevant that he calculated his own estimated of beta from the last year of daily returns. His estimate was 0.54, close to the five-year estimate from Value Line, but still notably lower
