# H. J. HEINZ Harvard Case Solution & Analysis

## H. J. HEINZ Case Solution

### Introduction

For the purpose of analyzing the investment in the North American Consumer Products division; the Weighted Average Cost of Capital (WACC) is considered to be a very critical aspect in the recent financial crises of the year 2008 to 2010, which made every industry suffereconomically. (Lipson, 2010). So, to assess the cash flows’ projections; one of the controversial issues for Heinz wasits weighted average cost of capital (WACC), which was due to 3 reasons that are as follows:

1. Financial melt-down in the market.
2. Low interest rates in the market.
3. Heinz was experiencing a high fluctuation in its share prices over the last three years.

### Cost of Debt

Cost of debt is composed of two types of debt i.e. long-term debt and short-term debt as mentioned in the balance sheet of the company. Cost of debt is derived using the bond valuation formula, as two different maturity bonds are mentioned in the company’s balance sheet.

### Beta and Cost of Equity

CAPM (Capital Asset Pricing Model) is used to explain the relationship between the expected stock returns and the systematic risk. (non-diversifiable risk). Through the CAPM, a direct relationship can be achieved between the expected return on the stock and the system’s risk. The beta of the instrument can be obtained using this model, the risk-free interest rate (in this case derived from the interest rate on treasury bills) and the stock exchange risk premium (generated by subtraction) to the risk-free rate of the market risk premium.

The main idea behind the calculation of CAPM is that the investors need two types of compensation. The first is the value of money over time, because as the time passes by; the value of money begins to decline and will become different in the future; second, no business can be exempted from risk. Each type of business risk has its own type of risks, which can be systemic (non-diversification, volatility and market risk) or non-systematic (dispersible and adjustable risk).

The risk-free interest rate is the first part of CAPM, which is compensation for the time value of the investor that is the cost of equity for the business, as investors compensate for the value of their currency. The risk-free interest rate is derived from the government bond yields, such as the US government bonds, because the government bonds are risk-free and because government bankruptcy is low,so it is unlikely to involve any systemic or non-systematic risk.

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