Running 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.
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