CASE STUDY

SUBMITTED BY:

BUNJAN, JOHANNA MAE G.

CRUZ, RONALYN A.

ELLAZO, JEVAN G.

GULTIANO, JENNIFE H.

LAMBUNAO, JUNALYN

SUBMITTED TO:

HUBERT M. INAS, CPA

The reason for the Heinz contextual investigation is to break down the dynamic and potential

results for the organization's future speculations and development systems. The specified time

period of the case is 2008-2010. Heinz experienced topline growth, but operating margins

declined because of an increase in Cost of Goods Sold (COGS).

These variables prompted a lower Return on Assets (ROA) which adversely influenced the

interior development rate. It is unprecedented for shopper merchandise organizations to be

affected by unpredictability of economic situations and the general economy. Indeed, Heinz is

undergoing some consumer-based transitions such as an increased focus on organic products

with higher nutrition value, budget-oriented purchasing decisions, and private- label growth

(2009 Heinz Annual Report). More significantly, the global economic environment continues to

present challenges; however, we are uncertain as to why the change in WACC may be occurring

when the company reports strong sales during the past three years. Therefore, we will also

evaluate the financial health of Heinz’ major competitors – Kraft Foods, Campbell Soup

Company, and Del Monte Foods – to gain a better understanding of WACC industry averages.

The case study analysis will address the following metrics during 2009-2010: risk free rate,

market premium, and beta; yields for outstanding debt issues; the WACC for the company and

its competitors; and the timespan of infrastructure investments

and capital projects. With this information we will have a better understanding of the company’s

cost of capital and Return on Equity (ROE).

advocates estimations of possession, superior, strengthening, and other representative driven

ways of thinking ("We Are Kraft Heinz," N.D.). Surely, these are key standards epitomizing a

long-standing, effective organization; however to the general shopper, the notable brands far

exceed the organization belief systems. For age Heinz has conveyed better nourishments than

family units and cafés that give solid consumer loyalty ("We Are Kraft Heinz," N.D.). As one of

America's biggest food companies, Heinz celebrated 140 years in 2009. The company goals

remain poised to provide consistent growth and increase shareholder value. The center classes of

ketchup and sauces keep on holding the first or second brand spots over the globe. Heinz's

standards – quality, development, trustworthiness, and sanitation – in mix with a great item

portfolio should keep on conveying results driving into the following decade (2009 H.J. Heinz

Company Annual Report).

The product offering began with fixings and extended throughout the years to bundled

merchandise and solidified nourishments. The most unmistakable brands and kitchen staples

incorporate Heinz Tomato Ketchup, Ore-Ida potatoes, Lea and Perrins and HP sauces, and Heinz

Beanz. In 2009, the organization revealed $10.1 billion in deals and $923 million in working

salary. Global deals speak to 60% of incomes (2009 H.J. Heinz Company Annual Report).

The 2009 yearly report features the four key activities: "Develop our Core Portfolio; Accelerate

Growth in Emerging Markets; Strengthen and Leverage our Global Scale; and Make Talent an

Advantage" (H.J. Heinz Company Annual Report). Other significant subjects tended to in the
yearly report remember shifts for buyer conduct, obtaining procedure, and maintainability (2009

H.J. Heinz Company Annual Report).

In February 2019, the US-based Food and Beverage (F&B) organization, Kraft Heinz Company

(Kraft Heinz) reported a weakness of US$ 15 billion, cut its profit by a third, and said that

American specialists had propelled an investigation into its obtainment rehearses. Moreover, the

organization's offer cost was seen to have fallen by 45% in the past a year.

Kraft Heinz was framed through a merger in 2015 between Kraft Foods Group, Inc. (Kraft) and

H. J. Heinz Company (Heinz). The merger was required to give noteworthy collaboration

benefits that remembered development for North America and worldwide extension, by joining

Kraft's brands with Heinz's universal stage.

KEY ISSUES

With worldwide ketchup deals in abundance of $1 billion, Heinz had over half of the residential

ketchup showcase and around 34% of the worldwide market. Bundling developments, for

example, the E-Z Squirt bottle had helped drive Heinz's worldwide piece of the overall industry

in ketchup up 15%, to 60 As U.S. inexpensive food chains expanded in worldwide prominence,

Heinz anticipated solid development in both single-serving parcel and mass ketchup and topping

(grill sauce, soy sauce, steak sauce, and so on.) deals. Nonetheless, Heinz ketchup confronted

difficulties from other brand-name ketchups, private-mark ketchups, and salsa. The expanded

prominence of salsa and other ethnic sauces, just as the lower cost structures for private-name

brands, were required to compromise Heinz's piece of the overall industry. Regardless of cost-
cutting activities, net benefit as a level of deals diminished to 36.6% from 37.3%, for the most

part because of lower evaluating and expanded item costs in Europe and Latin America. Industry

examiners expected solid development in worldwide nourishment administration request

(particularly in Europe and Asia) throughout the following five years. Key contenders included

Kraft, Unilever, Sara Lee, Campbell Soup Company, and Dole Food Company, Inc. Since Heinz

drew around 17% of its incomes from nourishment administration tasks (eateries, arenas, air

terminals, and so forth.), the organization had endured more than most handled nourishment

firms from the delayed consequences of September 11. All in all, the bundled nourishment

industry beat the S&P 500 for the initial seven months of 2004, posting a 5.7% versus a 2.1%

decrease for the more extensive list. Cost pressures were a key worry for the business, essentially

from expanded item, annuity, and fuel costs.

Heinz experienced topline development, however working edges declined in view of an

expansion in Cost of Goods Sold (COGS). These elements prompted a lower Return on Assets

(ROA) which adversely influenced the inside development rate.

Analysis

While deciding the YTM for the 2 securities, the long haul rates were chosen for this

examination. One of the securities has more than 20 years remaining, as opposed to taking a

normal of the short and long haul rates we pick the long haul as all coupon installments are

reinvested at the present yield. Any determination will convey hazard and we saw the transient

rate as excessively dependent on the ongoing changes in the market for our long haul
examination. These bonds give us a benchmark for the expense of obligation and the extent of

obligation that Heinz has long haul versus current obligation is 63% to 37%.

There are two exceptional Heinz-obligation issues. The obligation with 22 years to development

is a long haul obligation and the obligation with only a development time of 2 years is a transient

obligation. The YTL estimate equations have been utilized to register the yields of the two

obligation issues toward the finish of April 2010. The recipe utilized is appeared in the exceed

expectations spreadsheet.

For 2010, the long haul security (due 3/15/32) has the coupon pace of 6.750% and the present

expense of 95.47%. Future Value is 116.9; installment is 7.89075 and present worth is -

111.60443. We have a yield of 7.09%.

For 2010, the momentary security (due 10/15/12) has the coupon pace of 6.625% and the present

expense of 97.5700%. Future worth is 113.7; PMT is 7.532625 and PV is - 110.93709. We have

a yield of 7.56%.

For 2009, the long haul security (due 3/15/32) has the coupon pace of 6.750% and the present

expense of 95.95%. Future Value is 91.4; installment is 6.1695 and present worth is - 87.6983.

We have a yield of 7.05%.

expense of 97.9800%. Future worth is 116.9; PMT is 7.744625 and PV is - 114.53862. We have

a yield of 7.12%.

The Weighted Average Cost of Capital (WACC) is the market esteem weighted expense of

obligation and value, and is determined as follows:

WACC = E ∗ℜ+ D ∗Rd∗(1−T )

E+ D E+ D

E = Market Value of Equity

D = Market Value of Long-Term Debt Re = Cost of Equity

Rd = Cost of Debt

T = Income Tax Rate

ALTERNATIVE COURSE OF ACTION

So as to help future deals development, the firm needs to make sure about outside financing. The

initial step to distinguish requirements for a positive turnaround is to compute the Weighted

Average Cost of Capital (WACC). The WACC decides the suitable markdown rate. As indicated
by the Corporate Finance Institute, "WACC speaks to its mixed expense of capital over all

sources, including regular offers, favored offers, and obligation" (N.D.). The surmised rebate rate

speaks to the general required profit for the firm all in all.

It is additionally important to recognize the inward and outside components influencing the

market estimation of Heinz value and obligation.

EVALUATING THE COURSE OF ACTION

The weighted average cost of capital (WACC) is a combination of financing businesses through

both debt and equity. Typically, projects are funded using both costs of capital to form a

weighted average. The WACC ultimately represents the main obstacle companies must face

regarding the “value” that projects generate for the firm and shareholders. We can call this

“value” market success. We have analyzed how the value process starts (the methods of capital

budgeting) and how it goes through the market risk to end up at a weighted average cost of

capital that is used to determine the point where companies generate value.

The estimated WACC for the competitors (Kraft Foods, Campbell Soup, and Del Monte) are as

follows: 7.59%, 6.90%, and 8.49%.

WACC ratio represents the minimum rate of return that a company can produce value for its

investors. It means that the lower the WACC ratio, the healthier the company is. In order for

investor to invest their money into a company, they should look for companies that have lower

WACC ratio than its rate of return. By comparing Heinz’s WACC and its competitors, we can

see that Heinz’s WACC is in line with the industry. It is lower than Del Monte, which indicates

that WACC is investing in its capital more efficiently. The market value for Del Monte is
considerably lower and their debt to equity ratio is highest among the four companies. Campbell

Soup has the most similar market value, but they carry less debt. As a result their WACC is the

lowest amongst the sample competitors. Their beta is also lower which indicates that their stock

price is less volatile than Heinz. Kraft is an interesting competitor to analyze. They have the

same beta value and the debt to equity ratio is fairly similar. WACC between the companies is

7.64% vs. 7.59% which indicates that debt is a similar cost for the companies. The interesting

component is the size of Kraft, which is over three times the market value.

Despite their difference in market size, the WACC is most similar to this industry and Heinz and

reinforces our recommendation to update the WACC value used at Heinz.

RECOMMENDATION OF THE BEST COURSE OF ACTION

The stock cost of Heinz expanded 27% in 2010 while the S&P 500 expanded 35%. The

expansion in share cost legitimately clarifies the increment in Market Value and Equity in the

organization. The proportion of obligation to value is diminished essentially in light of the fact

that the value part expanded with share esteem. As depicted before, the proportion of obligation

and value are essential segments in ascertaining WACC. Being that the whole market dropped in

2009 and expanded in 2010, we discovered that the change in WACC isn't misleadingly incited

and it is fitting to modify the rate for Heinz as a company. The 2010 WACC falls in accordance

with the business and the storeroom contenders and is intelligent of what the firm will probably

look later on.