Memo: Cost of Capital
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Subject: Cost of Capital
In this case, I believe the goal is to estimate the weighted average cost of capital of Heinz during the period in question. To effectively estimate this value, we need to have a good understanding of their cost of equity and cost of debt. Further, we should have a fair amount of understanding about the cost of capital. As such, in this case we need to calculate the total amount of Heinz’s weighted average cost of capital (WACC).
Secondly, we need to examine Heinz’s performance for the years surrounding the year in question. In this regard, to calculate the total values as regards the company’s business we need to understand the values of 2008, 2009 and 2010. For instance, it is clear that the food industry was not as adversely affected by the 2007-2008 financial crisis as many other industries. Therefore, the cost of capital of Heinz during this period was not as affected either.
Thirdly, we need to examine the interest rates during the period in question. As the case mentions the rates in capital markets in 2010 were very volatile. Interest rates affect cost of capital since companies have to consider their debt in determining their cost of capital. Interestingly, credit spreads during this period were very high. This phenomenon coupled with the low level of long-term rates enabled borrowers to do so at very low costs.
We should also consider the premiums to consider the risk a company expects when investing. During the time period in question, the premiums companies considered were relatively low, even if market players recommended higher premiums for optimal market conditions.
Generally, our goal is to examine the data provided about Heinz and its competitors during the period in question, and estimate their cost of capital from thereon.
