Heinz: Cost of Capital
Income Statement (in thousands)
	2008	2009	2010
Revenue	9,885,556	10,011,331	10,494,983
Cost 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
Balance Sheet (in thousands)
	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	1,948,496
Total liabilities and Equity	10,565,043	9,664,184	10,075,711
Shares outstanding (millions)	311.45	314.86	317.69
Heinz Capital Market Prices of Typical Issues
	2008	2009	2010
Heinz Stock Price	$47.00	$34.42	$46.87
Bond Price: 6.750% coupon, semiannual bond due 3/15/32 (BBB rated)		91.4	1116.9
Bond Price: 6.625% coupon, semiannual bond due 10/15/12 (BBB rated)		116.5	113.7
1 + yield		97.57	1,192.29
1 + yield		124.22	121.23
Total of 1+yield		221.79	1,313.52
Estimated loss rate		60%	60%
Default rate BBB rated Average (2010)			0.5%
Default rate BBB rated Recession (2009)		3%
Debt cost of capital		4.95%	6%
Expected default		4.83	76.90
Expected default		6.15	7.82
Expected rate of return on bonds less default		92.74	1,115.39
Expected rate of return on bonds less default		118.07	113.41
Total Debt cost of capital		210.81	1,228.80
Dividends per Heinz		0.42	0.45
Standard deviation of Heinz
Correlation of Heinz to market
Standard deviation of Market
Beta
Comparable Firm Data
Financial Summary
	Kraft	Cambell Soup	Del Monte
Revenues ($ Million)	40,386	7,589	3,739
Book Value of equity ($ Million)	25,972	728	1,827
Book Value of debt ($ Million)	18,990	2,642	1,290
Total Debt/Equity	44,962	3,370	3,117
Tax rate	28%	28%	28%
WACC	0.88	0.78	0.88
Market Data
Beta	0.58	0.32	0.72
Shares outstanding ($ Millions)	1,735	363	182
Share price (dollars as of close April 30, 2010)	29.9	35.64	15.11
Typical Standard & Poors bond rating	BBB-	A	BB
Representative yeild on long-term debt	5.12%	4.36%	6.19%

1. What is the estimate for Heinz beta at the start of fiscal year 2010? Does the level of beta make sense (hint: What does Heinz make? Do its sales and cash flows vary significantly relative to the market?)

2. What is your best estimate of Heinz equity cost of capital, Re, at the start of fiscal year 2010? Other than beta, what two other variables do you need to consider calculating Re?

3. What were the yield-to-maturity on the two representative outstanding Heinz debt issues as of the end of April 2010? You will use this information to calculate Heinz cost of debt, Rd.

4. What was the WACC for Heinz at the start of fiscal year 2010? Other than Re and Rd, what other variables go into the calculation of WACC? How did you calculate them?

5. Finally, how does WACC for Heinz's compare to some of its competitors, Kraft Foods, Campbell Soup Company, and Del Monte Foods? Does this comparison make you more confident in your estimates?