Assignment:
Please read the attached case (and supplemental excel file). Your main objective is to determine the appropriate WACC that Heinz should use in evaluating capital projects in the second quarter of 2010. For the purposes of this analysis, make the following assumptions:
You are asked to make this determination in May 2010 based on information available at that time;
The projects being evaluated bear the same risk as the overall company; and
The projects are all long-term (10 years or more).
You will have to make a series of judgement calls about how to calculate the different components of WACC. Below are a list of questions that you must answer in developing your WACC estimate.
1. Cost of debt
a. What were the yields on the two representative outstanding Heinz-debt issuances? What were they a year earlier?
b. Next, you must make a decision on Heinz’s cost of debt for the WACC. Explain your choices. Please make sure you address the following two issues. First, should Heinz’s cost of debt be based on the YTM of the short-term bond, the long-term bond, or a blended YTM of both bonds? Justify your selection. If you choose the third option, also explain how recommend blending the rates. Second, consider the change in Heinz’s yields from April 2009 to April 2010, and the current level of credit spreads (Baa over 10-year). Do these factors affect your choice? Should you use current yields, past yields or some blend of the two? [EXP. 1]
2. Cost of Equity
a. What is the appropriate risk-free rate to use? 1-year, 5-year, 10-year or 30-year? Justify your decision. Does the fact that rates are close to historical lows give you any cause for concern? Explain why or why not. [EXP. 2]
b. The case has several estimates of the market risk premium. What is the appropriate market risk premium to use in your calculation? Note, you can pick one or a blend. However, you must justify your decision. [EXP. 3]
c. What beta will you use? Justify your decision. [EXP 4]
d. Based on your choices above, what is Heinz’s cost of equity as of April 2010? What was it a year earlier?
3. WACC
a. What are the capital structure weights for Heinz’s debt and equity in April 2010? What were they a year earlier?
b. What capital structure weights will you use to determine Heinz’s WACC? Current weights, past weight, a blend or some other option? Justify your choice. [EXP. 5]
c. Quantify Heinz’s WACC as of April 2009 and April 2010.
d. What are your best estimates of the WACC’s of Heinz’s competitors. How do these estimates influence your thinking about Heinz’s WACC? [EXP. 6]
Instructions:
For this assignment, you must submit an Excel file with three worksheets as instructed below:
This case requires more justification/explanations for your choices than previous cases. In order to make this easy to grade, the first worksheet in your Excel file should be labeled “EXPLANTIONS” and should contain the answers to the questions tagged [EXP. 1] through [EXP. 6].
The second worksheet should be labelled “Heinz WACC” and should contain all the calculations required for Heinz’s WACC.
The third spreadsheet should be labelled “Competitor WACC” and should contain all the calculations required for the competitors WACC.
For the entire file, I want to see all of your work presented in a concise, easy to understand format.
