Heinz Case

This memo will provide a recommendation of Heinz’s weighted average cost of capital. Currently, three major factors affect the company’s cost of capital. Firstly, there was a drastic change in Heinz’s year-end stock price from $47 in 2008 to $34 in 2009, and $47 in 2010. These changes questioned whether the weights should be modified from year to year to reflect the cost of equity changes. Secondly, if Heinz updated the cost of capital to reflect today’s low interest rates (especially for long-term bond rates) then there would be considerable bias in accepting projects. Finally, it is uncertain whether or not the recent financial crisis has affected the market’s overall tolerance for risk. This memo will provide an analysis of WACC’s major components and the issues surrounding Heinz’s cost of capital. A recommendation is provided regarding Heinz’s WACC in comparison to other major competitors Kraft Foods, Campbell Soup Company, and Del Monte Foods.

WACC is a firm’s cost of capital based on all capital sources such as common and preferred stock, bonds, and other long-term debt. This rate is used to determine what the company is expected to typically pay its security holders in order to finance firm assets. A firm’s WACC is positively correlated to its beta and rate of return on equity. A higher WACC indicates higher risk and decrease in valuation. When estimating a firm’s WACC, the components of its capital structure (which represent different sources of financing and thus generate different returns) and associated risks are proportionately weighted.