Why heinz wacc is not the correct discount rate

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Reference no: EM132059995

You are working for H.J. Heinz Company evaluating the possibility of selling a beverage. Heinz' WACC is 6.6%. Beverages would be a new line of business for Heinz, however, so the systematic risk of this business would likely differ from the systematic risk of Heinz' current business.

You need to find the WACC for Coca-Cola. Assume the risk-free rate is 10-year Treasury Bond yield of 2.45% and the market risk premium is 7%.

i) Explain why Heinz' WACC is not the correct discount rate for their new project.

ii) Go to yahoo finance and look for Coca-Cola's stock ticker. Find the equity cost of capital (rE) in two ways.

ii.1) First, in the Summary tab, find the company's beta and compute rE using the CAPM formula.

ii.2) Second, use the discounted cash flow formula. In the Statistics tab, find the Forward Annual Dividend Rate, this is Div1 in the formula. Next go to the Analysts tab, find the growth estimates section (Growth Estimates) and use the estimate for the Next 5 Years as g

ii.3) Is rE very different between the two methods? Which one do you prefer?

iii) Now find the weights (E and D) we'll use for the WACC equation. In the Summary tab you can find the market capitalization (or E) and in the Financials tab use the Balance Sheet to find the book value of long term debt (or D). Note: be careful with the units! Do not mix billions with millions

iv) Look in the Stockholder's Equity portion of the balance sheet, does your company have preferred stock?

v) Now go to the Income Statement and compute the average tax rate (Tc).

vi) Now find the cost of debt. Choose the Search tab. In the Issuer Name, search for "Coca Cola Co" or for "Pepsico Inc", this will ensure that you find the parent company and not subsidiaries. Look for the yield of a bond that has roughly ten year maturity (does not have to be exactly ten years). This is rD.

vii) Find rW ACC.

Reference no: EM132059995

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