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H. J. HEINZ Case Study Help

Del Monte’s WACC:

The Del Monte’s WACC is 7.18%, which comprises of 41% debt in the capital structure and 59% equity in the capital structure. Although the cost of equity and the cost of debt after tax in the Del Monte’s WACC during 2010, are: 9.09% and 4% respectively. The cost of equity is calculated by using a CAPM (Capital Asset Pricing Model) in which beta given in exhibit4 is 0.72. The risk-free rate and the average market premium are 3.69% and 7.5% respectively.

Table 5

Calculation of WACC
Kraft Campbell Del Monte
Total Assets 44,962 3352 3117
Total Debt 18,990 2,624 1,290
Debt Ratio 42% 78% 41%
Equity Ratio 58% 22% 59%
Tax Rate (Income Taxes 2010/EBT 2010) 28% 28% 28%
Cost of Debt 5.12% 4.36% 6.19%
After Tax Cost of Debt 4% 3% 4%
Cost of Equity 8.04% 6.09% 9.09%
WACC 6.21% 3.79% 7.18%
Cost of Equity
Kraft Campbell Del Monte
Beta 0.58 0.32 0.72
Rf (10-year market yield) 3.69% 3.69% 3.69%
Market Risk Premium (Average) 7.50% 7.50% 7.50%
cost of Equity 8.04% 6.09% 9.09%

Comparing Heinz with Other Comparable Firms

After WACC calculation of all the companies; it is observed that Heinz’s WACC is computed as 5.89%, which is below the Del Monte’s WACC and above the rest of the competitors’ WACC. Heinz’s WACC is similar to the Kraft’s WACC, which means that both the companies have almost same capital structure. Heinz has 70% of debt and 30% of equity in its capital structure, while Campbell has 42% of debt and 58% of equity in its capital structure. The tax rate is same for both the companies, while the cost of debt and cost of equity vary from each other. As the Kraft has higher debt in its portfolio, therefore the company has to pay more interest and enjoy the tax redemption. On the other hand, Heinz has equity in its investment and less debt ratio. As a result, the WACC of Campbell is lower than Heinz’s WACC.

When comparing Heinz with Del Monte, we found out that Del Monte’s WACC is greater than Heinz’. Del Monte also has higher debt as compared to Heinz, whereas Heinz has lower debt in its capital structure, which provides a huge benefit to Heinz, because due the low interest rate it will pay lower interest and enjoys tax redemption in a better way when compared to Del Monte.

Heinz in comparison with Campbell, has higher WACC because of lower debt and higher equity than its competitors. The Campbell has lower WACC in comparison to all the other rival companies.

A comparison of the cost of the capital structure based on other comparable data, shows that the only company with a capital structure similar to Heinz, is Campbell Soup. The specific beta-risk assumption used by the company in calculating the cost of equity is 0.62 for Heinz and 0.55 for Campbell Soup. This hypothesis suggests that Heinz’s higher cost of shares might restrain its growth. On the other hand, as compared to other companies with weaker debt structures; these two companies have higher debt capital structures and they enjoy greater savings due to an increased costs’ interests.

In comparison to other companies, such as: Kraft and Del Monte; Heinz received high-quality long-term debt with lower interest rates and higher debt ratings, while Kraft and Del Monte received low-quality debt as compared to Heinz. This has brought benefits to Heinz as fluctuations in low interest rates, resulted in low interest rates. Heinz also gained an advantage over Kraft and Del Monte, as the high leverage of the capital structure, provided significant tax benefits to Heinz.

Conclusion

Based on the aforementioned analysis and calculations; it is concluded that Heinz maintains a stable position in uncertain times as compared to its competitors, and it has proven to be one of the main market leaders in the food industry. Amidst the 2010 recession; the company’s profit margin declined only in the US region. In contrast to which, the company was able to increase its revenues from other regions. The company should also focus on improving the quality of high-quality food in line with consumers’ needs and preferences, which will help the company in havingbeneficial financial returns. The capital structure of the company is also good. The company has a WACC of 5.89%, which is lower than the Del Monte’s WACC and higher than that of other competitors. However, the company needs to do more efforts in order to reduce the WACC, to achieve significant returns.

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