H. J. Heinz Estimating The Cost Of Capital In Uncertain Times Case Study Solution
Best estimate of the WACC for Kraft Foods, Campbell Soup Company, and Del Monte Foods
The weighted average cost of capital is calculated for all the competitors of Heinz, which include: Kraft, Campbell and Del Monte. The cost of equity is calculated using the CAPM approach, in which the risk free rate of return is assumed to be the US’s treasury rate for 10 years, and the market risk premium is 5.5 percent for all competitors. Similarly, the beta of Kraft, Campbell and Del Monte are: 0.65, 0.55 and 0.7,respectively. Thus, the cost of equity of Kraft, Campbell and Del Monte, with 7.26% for Kraft, 6.71 percent for Campbell and 7.54 percent for Del Monte. The weighted average cost of capital of Kraft, Campbell and Del Monte are: 6.28 percent, 6.10 percent and 6.52 percent, respectively. By comparing the WACC of Heinz and its competitors; it can be seen that the WACC of Heinz is lower than the WACC of competitors and it is not aligned with the industry.
Due to the reason that Del Monte has lower debt; the WACC is also low and so is the beta, which indicates that Del Monte’s stock price is less volatile as compared to Heinz. The company has gained advantage over its competitors as its high leverage of the capital structure tends to offer significant tax benefits to the company. Additionally, the WACC of company is declined in 2010 as compared to 2009, which reflects what the company is expected face in the near future.........................
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