H. J. Heinz: estimating the cost of capital in uncertain times Case Solution And Analysis, HBR Case Study Solution & Analysis of Harvard Case Studies

INTRODUCTION

In this case, the projected weighted average cost of capital (WACC) has been calculated. In addition, how often a company should re-estimate the WACC and the effect of changes in the stock price on the WACC have also been discussed.

H. J. Heinz Company is a food manufacturing and distributing company. It manufactures products in three categories that are Ketchup and sauces, Meals and Snacks and Infant Nutrition. Heinz is a global powerhouse; it operates in more than 200 countries. The business segments of the company are based primarily on region: North American Consumer Products, U.S. Food service, Europe, and Rest of World. However, Heinz is now focusing on the emerging market, which is in the growing phase. Heinz is in the competitive market as there are other rivals who are larger than Heinz; however, it is still trying to cross them.

DIAGNOSIS OF PROBLEM

Solomon Sheppard, as a financial analyst of the company,was asked by his supervisor to provide a recommended WACC for the North American Consumer Products division of the company. Furthermore, Sheppard has to provide the discussion about the effect on Heinz’s WACC due to the recent changes in the stock price.

ANALYSIS

The weighted average cost of capital has been calculated for the North American Consumer Products division in this analysis and the effect on WACC due to the changes in Heinz’s stock price is also discussed.

QUESTION 01

The current stock price of Heinz is $ 46.87. It did not perform well in 2009 as it was $ 34.42. However, it performed well in 2008 as it was $ 47. Therefore,these fluctuations in the stock price can change the WACC of Heinz. The reason of the under performance in 2008 was the adverse changes in the economy. However, it reacted according to the economy in 2008 how ever it did not react the same in 2009, but again in 2010 it recovered from that position.

The changes in the stock price will create volatility in the stock price. The more the volatility;the more will be the risk for the investors. Therefore, in order to bear such risk, the investor will always demand the high return on their investments.H. J. Heinz estimating the cost of capital in uncertain times Case Solution

It is expected that adverse change in stock price will affect the capital structure as well. This is because adverse changes could raise the demand of further financing in order to meet cash requirements. The increase in the demand of finance will ultimately change the values of debt and equity. Therefore, the value of WACC will also be affected due to the decrease in stock price.

Unfavorable changes in the economy cause the change in stock prices of the company. Adverse change in stock price will affect the dividend payout ratio. Changes in dividend payments will ultimately affect the cost of capital of the company...................

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