H. J. Heinz Estimating The Cost Of Capital In Uncertain Times Harvard Case Solution & Analysis

H. J. Heinz Estimating The Cost Of Capital In Uncertain Times Case Study Analysis

Raising interest rates by 1% results in a higher WACC, indicating that Heinz is riskier than before and vice versa. The weighted average cost of capital for a business changes as interest rates rise, so if the interest rates rise; it is certain that the cost of capital will also rise. Similarly, the cost of capital decreases as interest rates fall. However, if the high interest rate continues to rise in the long run; it will seriously affect the profitability of the business as the business is heavily indebted. If the interest payment decreases with the maturity of the long-term debt; the firm might achieve higher profitability, because the firm pays low interest rates.

Comparing Heinz with Other Comparable Firms..

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 having beneficial 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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