- General Assessment Guidance
- For coursework, the submission word limit is 2,500 words. You must comply with the word count guidelines. You may submit LESS than 2,500 words but not more. Tables, diagrams, bibliography, appendices, annex and headings are NOT included within word count calculations. You must specify total word count on the front page of your report.
- You must submit an electronic version of the paper in MS Word format. This is to be uploaded into the VLE via the link provided to you by the lecturer.
- You must submit no more than one document.
- You may copy and paste workings from Excel into your Word submission. However the layout must be such that the markers can understand your calculations. In other words, do not simply copy a series of calculations. You must include explanations of each step of your workings. Failure to do so will result in a significant loss of marks.
- For coursework, please use font size 12 for body text and the typeface (font) should be Arial or Times New Roman with minimum 1.5 spacing.
- For headers and titles, please use font size 14. Your submission must have standard margins and page numbers.
- Please use English (UK) as your language in the submission.
- A total of 100 marks are available for this module assessment and you are required to achieve minimum 50% to pass this module.
- You also need to do a full bibliography of your sources.
- You are required to use only Harvard Referencing System in your submission. Any content which is already published by other author(s) and is not referenced will be considered as a case of plagiarism.
PART A: Description of the Assignment
WACC
Case Study: H.J. Heinz: estimating the Cost of Capital in Uncertain Times
- 1. What was the WACC for Heinz in fiscal year 2010? What was the WACC one year earlier? State and explain the assumptions use (25 marks)
Discussion of assumptions and sources Calculation of WACC
20 marks 5 marks
- 2. As pointed out in the case study, Solomon Sheppard was determined to quantify the WACC of Heinz to see the real cost of capital of the firm. But he saw that WACC is subject to change depending on the range of inpu Critically analyse the advantages and disadvantages in using WACC as a quantitative method for arriving at the opportunity cost of capital. (20 marks)
- 3. Given interest rates in 2010 were at historic lows and have remained low since, it might be advantageous for Heinz and other companies to dramatically increase the amount of debt on their balance sheet Explain the advantages and disadvantages of doing so in the context of the theories of Modigliani and Miller and others. (20 marks)
Student Guidance
Students will need to show all their workings for questions 1. It is not sufficient to simply state the result of your calculations. Given the range of input data when calculating WACC, you should demonstrate your understanding of how the various elements fit into the calculations and justify the choices you have made.
Question 2 is asking you to describe, define and quantify the use of WACC by corporations. Students should demonstrate their understanding of its strengths and weaknesses and the appropriateness, if any, of alternative methods.
In your answers, in addition to the information from the Case Study, please apply the concepts from the appropriate areas of financial and economic theory, discussed during this and all previous modules during your course. Your answers should include appropriate numerical data and, if appropriate, charts/graphs.
Question 3 is clearly about debt and optimum capital structure and as such, students should discuss the advantages and disadvantages of debt and equity. MM theories should underpin your analysis as well as any other relevant financial and economic theory.
See next page for PART B
PART B: Description of the Assignment
Net Present Value: Heinz Healthy Soups
After arriving at a suitable WACC, Solomon Sheppard decided to evaluate a new project:
Heinz was considering whether to develop a new range of healthy eating options, as their customer base had expressed a preference for food with lower sugar and fat content.
Consequently, after a marketing report which cost $100,000, Sheppard asked his team to draw up some financial plans to build up a new business, Heinz Healthy Soups, near their headquarters in Pittsburgh, Pennsylvania.
With a lifetime of 5 years, the project would include initial investments in new equipment, packaging and other fixed assets, totalling $70 million, to be depreciated over 5 years, using straight-line depreciation. At the end of the project, the equipment will be sold for $6 million.
Heinz already has available warehouse capacity needed for this new venture, in Pittsburgh. The new venture will occupy 10% of this warehouse. The warehouse is rented at a annual cost of $30 million. The wages for the project will be $15 million in the first year, rising by 2% per year for each subsequent year of the project; 20% of staff will be transferred from other Heinz businesses (they will not need to be replaced). Distribution costs will be 1% of sales of the new product.
In the first year, Heinz expects to sell 10% of the current quantity of non-healthy soups sold in supermarkets. In the following years, this will increase to 30%.
However, as a consequence of launching this new product, it is expected that sales of the existing non-healthy soup sales will go down. Sales in the traditional soups will are expected to decrease from $1.5 billion a year to $1.4 billion a year for the next 5 years.
The new soup range is a premium product. So it is expected that prices will be 5% higher than the tradition products. However, the cost of goods sold is anticipated to remain at 80% of sales.
Heinz expects to spend $10 million now on advertising this new product and $20 million in the first year of the product launch.
Accounts are payable in 15 days and the inventory corresponds to one month of sales. Accounts are receivable in 30 days.
It is assumed that the tax rate will be equivalent to Group tax.
- 4. Calculate a Profit and Loss statement for the pro (12 marks)
- 5. Calculate the FCFF of the project, taking into account the annual working capital requirements of the project. (8 marks)
- 6. Calculate and analyse the project’s NPV, IRR, payback period and discounted payback perio (15 marks)
Appendix – Further Briefing
For Questions in PART B of this assignment you should take account of the following further information on the project:
Question 4 is asking you create a Profit and Loss statement from the information given in the text. You will have to take into account the various cost items of the project to arrive at a profit figure for each year.
Question 5 asks you to create a separate calculation for to arrive at a FCFF for the project. You will have to take into account the various items of Working Capital (preferably shown in a separate calculation), as well as all the other costs, to arrive at a cash-flow figure for each year. This also requires you to show all your workings.
Question 6 also requires you to show all your workings to arrive at various indicators of the project’s return. You should use the WACC that you have calculated in Question 1 for the purposes of discounting the free cash flows. This WACC can be adjusted, or not, according to your thinking about the project’s risk profile.
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