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Find the WACC for Heinz: Sheppard gathered some market data related to Heinz ( also shown in Exhibit 1 2 . 3 ) . He
Find the WACC for Heinz: Sheppard gathered some market data related to Heinz also shown in Exhibit He easily obtained historic stock price data. Most sources he accessed estimated the companys beta using the previous five years of data at about Sheppard obtained prices for two bonds he considered representative of the companys outstanding borrowings: a note due in and a note due in 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 shortterm borrowing and Sheppard estimated these funds cost about
What most surprised Sheppard was the diversity of opinions he obtained regarding the market risk premium. Integral to calculating the required return on a companys equity using the capital asset pricing model, this rate reflected the incremental return an investor required for investing in a broad market index of stocks rather than a riskless bond. When measured over long periods of time, the average premium had been about But when measured over shorter time periods, the premium varied greatly; recently the premium had been closer to and by some measures even lower. Most striking were the results of a survey of CFOs indicating that expectations were for an even lower premium in the near futureclose to On the other hand, some asserted that market conditions in only made sense if a much higher premiumsomething close to were assumed.
As Sheppard prepared for his cost of capital analysis and recommendation, he obtained recent representative data for Heinzs three major US competitors Exhibit This information would allow Sheppard to generate costofcapital estimates for these competitors as well as for Heinz. Arguably, if market conditions for Heinz were unusual at the time, the results for competitors could be more representative for other companies in the industry. At the very least, Sheppard knew he would be more comfortable with his recommendation if it were aligned with what he believed was appropriate for the companys major competitors.
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