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CorporateFinance.docxRunning Head: ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES 2
ESTIMATING THE COST OF CAPITAL IN UNCERTAIN TIMES 2
Case: H. J Heinz: Estimating the Cost of Capital in Uncertain Times.
Student’s Name
Institutional Affiliation
Instructor’s Name
Course Code
Due Date
1.
|
Bond 2032 |
2009 |
2012 |
|
|
|
|
Settlement Date |
4/30/2009 |
4/30/2012 |
|
|
|
|
Maturity Date |
3/15/2032 |
3/15/2032 |
|
|
|
|
Coupon |
6.75% |
6.75% |
|
|
|
|
Price |
91.4 |
116.9 |
|
|
|
|
Frequency |
2 |
2 |
|
|
|
|
Yield |
7.54% |
5.42% |
|
|
|
|
bond (2032) |
2009 |
2010 |
|
|
|
|
Settlement date |
4/30/2009 |
4/30/2010 |
|
|
|
|
Maturity Date |
10/15/2012 |
10/15/2012 |
|
|
|
|
Coupon |
6.63% |
6.63% |
|
|
|
|
Price |
116.5 |
113.7 |
|
|
|
|
Frequency |
2 |
2 |
|
|
|
|
Yield |
1.69% |
0.97% |
|
|
|
|
H.J Heinz Market value of Equity |
2009 |
2010 |
|
|
|
|
Number of shares outstanding |
314.86 |
317.69 |
|
|
|
|
Stock price |
$34.42 |
$46.87 |
|
|
|
|
Market Cap |
$10,837.48 |
$14,890.13 |
|
|
|
|
H.J. Heinz Market Value of Debt |
2008 |
2009 |
2010 |
|
|
|
Cash |
617687 |
373145 |
483253 |
|
|
|
Short-term debt |
124290 |
61297 |
43853 |
|
|
|
Long-term debt |
4730946 |
5076186 |
4559152 |
|
|
|
Current portion of long-term debt |
328418 |
4341 |
1516700 |
|
|
|
Net debt |
4565967 |
4768679 |
4134919 |
|
|
|
H.J. Heinz Corporate tax rate |
2008 |
2009 |
2010 |
|
|
|
Income before taxes |
1230763 |
1319883 |
1290454 |
|
|
|
Income taxes |
372587 |
375483 |
358514 |
|
|
|
Tax rate |
30.27% |
28.45% |
27.78% |
28.83% |
|
|
Cost of Equity |
|
|
|
|
|
|
Beta |
0.65 |
|
|
|
|
|
Risk free rate |
3.69% |
|
|
|
|
|
Market Premium |
7.50% |
|
|
|
|
|
Cost of Equity |
8.57% |
|
|
|
|
|
Cost of Debt |
2008 |
2009 |
2010 |
|
|
|
Net debt |
$4,837,750 |
5121764 |
4589578 |
|
|
|
Interest expense |
$323,289 |
$275,485 |
250574 |
|
|
|
Cost of Debt |
|
5.53% |
5.16% |
|
|
The yields of the bonds with the settlement date of 2032 in 2009 and 2012 were; 7.54% and 5.42% respectively. This was a decline in the bond yield. Value of equity in the years 2009 and 2019 were $10837.48 and $ 14890.13. It means that in the year 2010, the stocks were highly valued. Cost of debt in the two years were; 5.53% and 5.16% meaning that there was a decrease in the cost of getting debt.
2. WACC for 2010 and 2009.
|
WACC |
2009 |
2010 |
|
Shares outstanding |
314.86 |
317.69 |
|
Stock Price |
34.42 |
46.87 |
|
Market cap |
10837.48 |
14890.13 |
|
Debt (Million) |
4768.68 |
4134.92 |
|
Tax Rate |
28.83% |
28.83% |
|
Cost of Equity |
8.57% |
8.57% |
|
Cost of Debt |
5.53% |
5.16% |
|
WACC |
7.15 |
7.5 |
The Weighted Average Cost of capital (WACC) in 2009 was 7.15% and in 2010 it was 7.5%. This meant an increase in the cost of capital for the company.
3.
|
|
Kraft |
Campell Soup |
Del Monte |
|
Market Value of Equity |
$51,876,500,000 |
$12,937,320,000 |
$2,750,020,000 |
|
Market Value of Debt |
$18,990,000,000 |
$2,624,000,000 |
$1,290,000,000 |
|
Total Value of Debt + Equity |
$70,866,500,000 |
$15,561,320,000 |
$4,040,020,000 |
|
Weight of Equity |
0.73 |
0.83 |
0.68 |
|
Weight of Debt |
0.27 |
0.17 |
0.32 |
|
Beta |
0.65 |
0.55 |
0.70 |
|
Risk Free Rate |
3.69% |
3.69% |
3.69% |
|
Risk Premium |
7.50% |
7.50% |
7.50% |
|
Cost of Equity |
8.57% |
7.82% |
8.94% |
|
Cost of Debt |
5.12% |
4.36% |
6.19% |
|
Tax Rate |
28% |
28% |
28% |
|
After tax cost of Debt |
3.69% |
3.14% |
4.46% |
|
WACC |
7.26% |
7.03% |
7.51% |
The Weighted Average Cost of capital for Kraft, Campell Soup and Del Monte were; 7.26%, 7.03% and 7.51%respectively. This implies that Campell obtained capital more cheaply than all the others.
