1. Summarize the case

2. What is going on at Chestnut Foods?

3. Do you agree with Meyers dinner conversation assertions, why or why not?

4. Estimate a risk-adjusted cost of capital for the two business units based on the comparable companies WACC (table to the right) and comment on whether Meyers graph is accurate.

5. How does the choice of a constant versus risk-adjusted hurdle rate affect the evaluation of Chestnuts two divisions?

Thanks in advance!

208 Part Three Estimating the Cost of Capital & Manitoba Railway. Six years later, on a trip to Chicago, Ilinois, to visit the Colu bian Exposition, Chestnut happened to come upon the Maxwell Street Market. vibrant meling-pot community of merchants of eastern European descent. At th market, he had a chance meeting with Lem Vigoda and George Maszk, founders of V&M Classic Foods, which provided a range of meat and fish products as well a preserves and condiments. Through them he witnessed a nascent ad hoc distribution system to neighborhood groceries in the rapidly growing city. A vision of wholesale food production and distribution struck him, and he returned to Minneapolis deter. mined to realize it. By 1920, as regional grocery chains had begun to materialize, Chestnut, since joined by his sons Thomas and Andrew, had purchased V&M among other food busi. nesses. Their plan was for the expanded Chestnut to stock the regional grocery chains across the upper Midwest, while also continuing to supply railroad dining cars and beginning in 1921, a Chestnut chain of automats in Chicago and Detroit. Otto Chestnut died in 1927 at age 62, but the company was well positioned to weather the Great De pression; in 1935, the Chestnut brothers sold the automat division to Horn& Hardar then used the proceeds to purchase farmland in Florida and central California, In the postwar period, as the supermarket model emerged, Chestnut grew with it, both organi- cally and through acquisition, going public in 1979. By 2013, the company was valued at $1.8 billion, with annual profits of more than S130 million. Chestnut sought to "provide hearty sustenance that gets you where you're The firm had two main business segments: Food Products, which produced a broad range of fresh, prepackaged, and processed foods for retail and food services, and In- struments, which delivered systems and specialized equipment used in the processing and packaging of food products. Instruments provided a variety of quality control and automation services used within the company. The company took increasing pride in the high quality of its manufacturing process and believed it to be an important differ- entiator among both investors and consumers In recent years, Chestnut's shares had failed to keep pace with either the overall stock market or industry indexes for foods or machinery (see Exhibit 14.1). The com- pany's credit rating with Standard & Poor's had recently declined one notch to A- Securities analysts had remarked on the firm's lackluster earnings growth, pointing to increasing competition in the food industry due to shifting demands. One prominent Wall Street analyst noted on his blog, "Chestnut has become as vulnerable to a hostile takeover as a vacant umbrella on a hot beach." Food Products Division The Food Products division provided a range of prepackaged and frozen products related to the bread and sandwich market for both institutional food services and ne- tail grocery distribution throughout North America, and some limited distribution in parts of Central and South America. Revenues for the segment had long been stable: the company achieved an average annual growth rate of 2% during 2010 through 2013. In 2013, segment net operating profit after tax (NOPAT) and net assets were S1.4 billion respectively. Looking to the foreseeable future, operating $88 million and$ 210 Part Three Estimating the Cost of Capital Instruments division sales had increased by nearly 20% in 2013, Segment NOPAT wa, $46 million, and net assets were $600 million. The expected return on capital division over the foreseeable future was 7.7%. Recent Developments Concerned above all else with the poor stock-price performance, and mindful of the instrument industry, Pederson hoped im portance of scale to profitability in the to sustain corporate growth opportunities by raising S1 billion to invest in the expansion of the Instruments division. She had been delighted with the market's strong interest for the high-value-added offerings the division maintained and believed that funneling in- vestment in its direction wasthe way forward for Chestnut She believed that the 7.7% expected returns for this division could be maintained with additional company invest ment. She also believed that the tradition-laden company name failed to capture the firm's strategic direction and that the name "CF Intermational" better reflected the growth and modern dynamism envisioned by leadership. At the dinner meeting, as over the past few weeks, her initiative had generated partisan reactions from the company's two divisions. Curiously, much of the discussion at dinner focused on the rather pedestrian topic of the company hurdle rate. Meyer had strongly contended from her perspective in Food Products that the two segments of the business were different enough that they warranted separate hurdle rates: Rob Suchecki VP of Instruments, was ardent in his opposition. Look. Claire, to investors, the firm is just a big black box. They hire us to take care of what's inside the box and judge us by the dividends coming out of the box. Our job as managers should be to put their money where the returns are best. Consistent with this reality, our company has a long- standing policy of using a single common hurdle rate. If that hurdle rate takes from an underperforming division and gives to a more profitable division, isn't that how it's supposed to work? We're all well aware that SUCHECK investors consider past profits unacceptable. Rob, the question is how you define profitability. High-return investments MEYER: are not necessarily the best investments, and to be fair, our investors are way more savvy than you are giving them credit for they have a wide range of information sources and analytic tools at their disposal and have a firm grasp on what is going on inside the company. They appreciate the risk and return of the different business units, and they adjust performance expectations accordingly. So to this type of investor, different hurdle rates for the different levels of risk reflects how things really are. Recently, the company's return on capital had been 67%. Company management applied a corporate hurdle rate of 7.0% to all capital projects andt the evaluation of business unit performance. See Exhibit 2for the company weighsed average cost of capital (WACC) calculation, Exhibit 3 for the prevailing capital ma rates, and Exhibit 4 for comparable firm information Case 14 Chestnt Foods 211 But Claire, multiple hurdle to create discord among the ranks. If you set the hurdle rate for Food Prod- ucts lower than the firm-wide hurdle rate, you're just moving your divi- sion's goalposts closer to the ball. You haven't improved performance, you've only made it easier to score! SUCHECKI: rates create all sorts of inequities that are bound You've got to realize, Rob, that we are playing in different leagues. Each part of the business has to draw on capital differently, because the rules for each unit are different, If Food Products was on its own, investors would be happy with a lower return because Food Products' risk is so much lower. Stability has its perks. And likewise, if Food Products could raise capital on its own, we'd surely get that capital at a cheaper rate. Different leagues? The fact is that we don't raise capital separately: we raise it as a firm, based on our overall record. Our debt is Chestnut debt and our equity is Chestnut equity. It's a simple fact that investors expect re- turns that beat our corporate cost of capital of 7.0%. It is only by growing cash flow company-wide that investors are rewarded for their risk capital. In fact, being diversified as a company most likely helps reduce our bor- rowing costs, letting us borrow more as a unit than we could separately. Rob, you know very well the kind of problems that thinking creates. If 70% is always the hurdle, the company will end up overinvesting in high-risk projects. Why? Because sensible, low-risk projects won't tend to clear the hurdle. Before long, the company will be packed with high-risk projects, and 70% will no longer be enough to compensate investors for the higher risk. By not accommodating multiple hurdle rates, we are setting ourselves up for all sorts of perverse investment incentives. The Food Products division is getting starved for capital. penalized for being a safer bet, while the Instru- ments division is getting overfed, benefitgfrom a false sense of security. Hold on, I object! The reason Food Products is not getting capital is because there's no growth in your division. Instruments is coming on like gangbusters. Why would investors want us to put additional capital into a business that is barely keeping up with inflation? MEYER: SUCHECKI: MEYER: SUCHECKI: At this point, pens and paper napkins were procured for Meyer, who presented the group with a diagram illustrating her argument (Figure 14.1) before continuing. MEYER: With a plot of risk versus return, the dashed line is our current corporate hurdle rate based on the average risk of the company. The solid line is a theoretical hurdle rate that adjusts for the risk of businesses within the company on capital, which doesn't clear the corporate hurdle rate, but if you adjust for risk, it does clear it, and it is profitable Instruments is the opposite. It's marked on the graph with an "L" It can expect 77% returns, which clears the c hurdle rate exceeds 77% Unless we are careful to adjust for that risk. " remains a hidden cost, and we are fooling ourselves. Food Products is marked with an" It is expected to earn 63% e hurdle. But since it is inherently riskier, the risk-adjusted 1 Part Three Estimating the Cost of Capital FIGURE 14.1. I Meyer's diagram of constant versus risk-adjusted hurdie rates Food Products Corporate hurdle rate Risk Level Source: Created by case writer. I believe it is pure speculation to claim that the risk adjustment line you've sketched out is anywhere close to that steep. Second, even if you are theoretically correct, I believe there is practical wisdom in maintaining a single, simple, consistent, and understandable performance criterion. A single measure of the cost of money makes NPV results consistent, at leas in economic terms. If Chestnut adopts multiple rates for discounting cash flows, the NPV and economic-profit calculations are going to lose their SUCHECKI Claire, meaning, and business segments won't be able to make comparisons At this point, Pederson had finally managed to rein in the heated debate and redirect the conversation to matters that were less controversial. The Future of Chestnut the issues before her to influence Rollo van Muur's attack on management, but as Suchecki made it sound? Was Instruments underperforming, as Van Muur and Mee It had been quite a night. Pedersen realized that she didn't have the time to resolve a proposal she made needed to be clear on its merits. Her thoughts returned to the discu sion between the VPs. Was the historical Chestnut way of doing business as defensible asserted? She knew that Van Muur's purchases had been prompted by depressed share price. In light of this development, weren't her investment and idenig proposals all the more relevant? Case 14 Chestnut Foods 213 I14Value of $1.00 Invested from January 2010 to December 2013 (weekly adjusted close $1.80 S&P 500 $1.60 Machinery Industry $1.40 $1.20 all Chestnut $1.00 Food Industry $0.80 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Data source: Yahoo! Finance and case writer data. Part Three Estimating the Cost of Capital EXHIBIT 14.2 Estimation of WACC for Chestnut Foods (year-end 2013 Chestnut Foods Hurdle Rate as of December 2013: 7.0% Chestnut uses a hurdle rate that reflects prevailing rates of return in financial markets using a weighted average of both debt and equity securities. The current mix of debt and equity in Chestnuts capital structure on a market-value basis is 20% debt and 80% equity. The prevail- ing yield on debt of similar credit risk is estimated at 3.5%. Based on a marginal corporate tax rate of 37%, the after-tax cost of debt is 2.2%. The cost of equity for Chestnut is estimated at 82% based on the CAPM with a beta of 0.9, a market risk premium of 6.0%, and a risk-free rate of 2.8%." Based on these estimates, the WACC is 7.0%. alternative model that uses a market risk premium of 9% and a risk-free rate of 0.1% gives a smlar costd equity estimate EXHIBIT 14.3 Capital Market Data, December 2013 Yield 30-Day Treasury Bill 10-Year Treasury Bond 10-Year Corporate Bonds of Industrial Companies 0.1% 2.8% 2.8% 2.9% 3.2% 3.3% 3.5% 3.8% 4.1% 4.6% 5.8% 6.5% 6.5% 6.8% 8.4% 9.0% Historical Market Risk Premium Equity Market Index Less Government Debt) 6.0% Data source: Bloomberg, case writer estimates Financial Data for Industry Comparables, December 2013 (dollar figures in XHIBIT 14.4I S&P Bond Rating Equity Beta Total Equity (Book Value) Total Equity (Market Value) Total Debt 0.90 Chestnut Foods 461 1,544 1,840 Food Processing Boulder Brands Campbell Soup ConAgra Foods Diamond Foods Flowers Foods General Mills Hormel Foods Kellogg J. M. Smucker Tyson Foods 0.55 0.60 0.70 0.75 0.50 0.55 0.65 0.60 0.70 0.80 298 4,832 9,590 593 923 8,645 250 7,358 2,241 1,942 355 1,349 5,472 167 1,076 6,633 3,311 3,545 5,168 6,285 958 13,223 13,805 578 31,245 11,759 21,841 10,904 11,469 Instruments Badger Meter Dresser-Rand Flowserve Honeywell Idex Measurement Specialties Mettler-Toledo Wendell Instruments 1.06 1,287 1,200 8,829 774 129 413 197 1,297 1,870 17,467 1,573 723 4,549 10.767 74,330 5,933 944 7,154 230 1.30 1.25 1.35 935 0.52 NA dentifies bond ratings that are estimated by case writer (continued) Comparables, December 2013 (dollar figures Financial Data for Industry in millions) (continued) EXHIBIT 14.4 1 Company Description Food Processing Boulder Brands Food products focusing on health and weliness, including gluten-free, diabetic-friendw and low-fat offerings such as soy milk, buttery spreads, snack bars, and entre alternatives; based in Boulder, CO. food products; based in Camden, NJ Campbell Soup ConAgra Foods Condensed and ready-to-serve convenience Consumer temperature classes; based in Omaha, NE. and commercial food products across frozen, refrigerated, and Packaged nuts and snack products for consumer and commercial channels; based in San Francisco, CA Diamond Foods Flowers Foods General Mills Baked goods for warehouse and direct-to-store delivery based in Thomasville, GA Branded and unbranded food products for consumer and commercial distribution; based in Minneapolis, MN. Fresh and refrigerated meat, snack, and speciaty food products for retail and food service distribution; based in Austin, MN. Hormel Foods Ready-to-eat cereals and convenience food products; based in Battle Creek, M Coffee, fruit spread, beverage, and specialty food products for retail and wholesale distribution; based in Orrville, OH. Fresh beef, pork, and chicken, and related prepared food products for retail and wholesale distribution; based in Springdale, AR Kellogg J. M. Smucker Tyson Foods Instruments Water meters for municipal water utilities; pipeline flow measurement for food and beverage, pharmaceutical, utility, and HVAC industries; based in Milwaukee, WI Rotating equipment for oil, gas, and petrochemical industries; based in Houston, TX Pumps, valves, seals, and boiler systems for petroleum, chemical, water, mining, pharmaceutical, and other industries; based in Irving, TX. Electric controls, surveillance, monitoring, and associated software for defense, air traffic control, utilities, and industry: based in Minneapolis, MN. Pumps, flow measurement for food, chemical, industrial, and energy industries; pumps, air compressors, and optical components for health, scientific, defense, and aerospace applications; based in Lake Forest, IL. Equipment sensors for vehicle, medical, home appliance, aerospace, and industrial applications; based in Hampton, VA Weighing, chemical, and assorted laboratory instruments for food retail, industrial and scientific research applications; based in Columbus, O Control and monitoring instrumentation for fast-food restaurants: young based in Tucson, AZ Badger Meter Dresser-Rand Flowserve Honeywell Idex Measurement Specialties Mettler-Toledo Wendell Instruments company Data source: Bloomberg. Yahoo! Finance, Value Line, and case writer estimates 208 Part Three Estimating the Cost of Capital & Manitoba Railway. Six years later, on a trip to Chicago, Ilinois, to visit the Colu bian Exposition, Chestnut happened to come upon the Maxwell Street Market. vibrant meling-pot community of merchants of eastern European descent. At th market, he had a chance meeting with Lem Vigoda and George Maszk, founders of V&M Classic Foods, which provided a range of meat and fish products as well a preserves and condiments. Through them he witnessed a nascent ad hoc distribution system to neighborhood groceries in the rapidly growing city. A vision of wholesale food production and distribution struck him, and he returned to Minneapolis deter. mined to realize it. By 1920, as regional grocery chains had begun to materialize, Chestnut, since joined by his sons Thomas and Andrew, had purchased V&M among other food busi. nesses. Their plan was for the expanded Chestnut to stock the regional grocery chains across the upper Midwest, while also continuing to supply railroad dining cars and beginning in 1921, a Chestnut chain of automats in Chicago and Detroit. Otto Chestnut died in 1927 at age 62, but the company was well positioned to weather the Great De pression; in 1935, the Chestnut brothers sold the automat division to Horn& Hardar then used the proceeds to purchase farmland in Florida and central California, In the postwar period, as the supermarket model emerged, Chestnut grew with it, both organi- cally and through acquisition, going public in 1979. By 2013, the company was valued at $1.8 billion, with annual profits of more than S130 million. Chestnut sought to "provide hearty sustenance that gets you where you're The firm had two main business segments: Food Products, which produced a broad range of fresh, prepackaged, and processed foods for retail and food services, and In- struments, which delivered systems and specialized equipment used in the processing and packaging of food products. Instruments provided a variety of quality control and automation services used within the company. The company took increasing pride in the high quality of its manufacturing process and believed it to be an important differ- entiator among both investors and consumers In recent years, Chestnut's shares had failed to keep pace with either the overall stock market or industry indexes for foods or machinery (see Exhibit 14.1). The com- pany's credit rating with Standard & Poor's had recently declined one notch to A- Securities analysts had remarked on the firm's lackluster earnings growth, pointing to increasing competition in the food industry due to shifting demands. One prominent Wall Street analyst noted on his blog, "Chestnut has become as vulnerable to a hostile takeover as a vacant umbrella on a hot beach." Food Products Division The Food Products division provided a range of prepackaged and frozen products related to the bread and sandwich market for both institutional food services and ne- tail grocery distribution throughout North America, and some limited distribution in parts of Central and South America. Revenues for the segment had long been stable: the company achieved an average annual growth rate of 2% during 2010 through 2013. In 2013, segment net operating profit after tax (NOPAT) and net assets were S1.4 billion respectively. Looking to the foreseeable future, operating $88 million and$ 210 Part Three Estimating the Cost of Capital Instruments division sales had increased by nearly 20% in 2013, Segment NOPAT wa, $46 million, and net assets were $600 million. The expected return on capital division over the foreseeable future was 7.7%. Recent Developments Concerned above all else with the poor stock-price performance, and mindful of the instrument industry, Pederson hoped im portance of scale to profitability in the to sustain corporate growth opportunities by raising S1 billion to invest in the expansion of the Instruments division. She had been delighted with the market's strong interest for the high-value-added offerings the division maintained and believed that funneling in- vestment in its direction wasthe way forward for Chestnut She believed that the 7.7% expected returns for this division could be maintained with additional company invest ment. She also believed that the tradition-laden company name failed to capture the firm's strategic direction and that the name "CF Intermational" better reflected the growth and modern dynamism envisioned by leadership. At the dinner meeting, as over the past few weeks, her initiative had generated partisan reactions from the company's two divisions. Curiously, much of the discussion at dinner focused on the rather pedestrian topic of the company hurdle rate. Meyer had strongly contended from her perspective in Food Products that the two segments of the business were different enough that they warranted separate hurdle rates: Rob Suchecki VP of Instruments, was ardent in his opposition. Look. Claire, to investors, the firm is just a big black box. They hire us to take care of what's inside the box and judge us by the dividends coming out of the box. Our job as managers should be to put their money where the returns are best. Consistent with this reality, our company has a long- standing policy of using a single common hurdle rate. If that hurdle rate takes from an underperforming division and gives to a more profitable division, isn't that how it's supposed to work? We're all well aware that SUCHECK investors consider past profits unacceptable. Rob, the question is how you define profitability. High-return investments MEYER: are not necessarily the best investments, and to be fair, our investors are way more savvy than you are giving them credit for they have a wide range of information sources and analytic tools at their disposal and have a firm grasp on what is going on inside the company. They appreciate the risk and return of the different business units, and they adjust performance expectations accordingly. So to this type of investor, different hurdle rates for the different levels of risk reflects how things really are. Recently, the company's return on capital had been 67%. Company management applied a corporate hurdle rate of 7.0% to all capital projects andt the evaluation of business unit performance. See Exhibit 2for the company weighsed average cost of capital (WACC) calculation, Exhibit 3 for the prevailing capital ma rates, and Exhibit 4 for comparable firm information Case 14 Chestnt Foods 211 But Claire, multiple hurdle to create discord among the ranks. If you set the hurdle rate for Food Prod- ucts lower than the firm-wide hurdle rate, you're just moving your divi- sion's goalposts closer to the ball. You haven't improved performance, you've only made it easier to score! SUCHECKI: rates create all sorts of inequities that are bound You've got to realize, Rob, that we are playing in different leagues. Each part of the business has to draw on capital differently, because the rules for each unit are different, If Food Products was on its own, investors would be happy with a lower return because Food Products' risk is so much lower. Stability has its perks. And likewise, if Food Products could raise capital on its own, we'd surely get that capital at a cheaper rate. Different leagues? The fact is that we don't raise capital separately: we raise it as a firm, based on our overall record. Our debt is Chestnut debt and our equity is Chestnut equity. It's a simple fact that investors expect re- turns that beat our corporate cost of capital of 7.0%. It is only by growing cash flow company-wide that investors are rewarded for their risk capital. In fact, being diversified as a company most likely helps reduce our bor- rowing costs, letting us borrow more as a unit than we could separately. Rob, you know very well the kind of problems that thinking creates. If 70% is always the hurdle, the company will end up overinvesting in high-risk projects. Why? Because sensible, low-risk projects won't tend to clear the hurdle. Before long, the company will be packed with high-risk projects, and 70% will no longer be enough to compensate investors for the higher risk. By not accommodating multiple hurdle rates, we are setting ourselves up for all sorts of perverse investment incentives. The Food Products division is getting starved for capital. penalized for being a safer bet, while the Instru- ments division is getting overfed, benefitgfrom a false sense of security. Hold on, I object! The reason Food Products is not getting capital is because there's no growth in your division. Instruments is coming on like gangbusters. Why would investors want us to put additional capital into a business that is barely keeping up with inflation? MEYER: SUCHECKI: MEYER: SUCHECKI: At this point, pens and paper napkins were procured for Meyer, who presented the group with a diagram illustrating her argument (Figure 14.1) before continuing. MEYER: With a plot of risk versus return, the dashed line is our current corporate hurdle rate based on the average risk of the company. The solid line is a theoretical hurdle rate that adjusts for the risk of businesses within the company on capital, which doesn't clear the corporate hurdle rate, but if you adjust for risk, it does clear it, and it is profitable Instruments is the opposite. It's marked on the graph with an "L" It can expect 77% returns, which clears the c hurdle rate exceeds 77% Unless we are careful to adjust for that risk. " remains a hidden cost, and we are fooling ourselves. Food Products is marked with an" It is expected to earn 63% e hurdle. But since it is inherently riskier, the risk-adjusted 1 Part Three Estimating the Cost of Capital FIGURE 14.1. I Meyer's diagram of constant versus risk-adjusted hurdie rates Food Products Corporate hurdle rate Risk Level Source: Created by case writer. I believe it is pure speculation to claim that the risk adjustment line you've sketched out is anywhere close to that steep. Second, even if you are theoretically correct, I believe there is practical wisdom in maintaining a single, simple, consistent, and understandable performance criterion. A single measure of the cost of money makes NPV results consistent, at leas in economic terms. If Chestnut adopts multiple rates for discounting cash flows, the NPV and economic-profit calculations are going to lose their SUCHECKI Claire, meaning, and business segments won't be able to make comparisons At this point, Pederson had finally managed to rein in the heated debate and redirect the conversation to matters that were less controversial. The Future of Chestnut the issues before her to influence Rollo van Muur's attack on management, but as Suchecki made it sound? Was Instruments underperforming, as Van Muur and Mee It had been quite a night. Pedersen realized that she didn't have the time to resolve a proposal she made needed to be clear on its merits. Her thoughts returned to the discu sion between the VPs. Was the historical Chestnut way of doing business as defensible asserted? She knew that Van Muur's purchases had been prompted by depressed share price. In light of this development, weren't her investment and idenig proposals all the more relevant? Case 14 Chestnut Foods 213 I14Value of $1.00 Invested from January 2010 to December 2013 (weekly adjusted close $1.80 S&P 500 $1.60 Machinery Industry $1.40 $1.20 all Chestnut $1.00 Food Industry $0.80 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Jul-13 Data source: Yahoo! Finance and case writer data. Part Three Estimating the Cost of Capital EXHIBIT 14.2 Estimation of WACC for Chestnut Foods (year-end 2013 Chestnut Foods Hurdle Rate as of December 2013: 7.0% Chestnut uses a hurdle rate that reflects prevailing rates of return in financial markets using a weighted average of both debt and equity securities. The current mix of debt and equity in Chestnuts capital structure on a market-value basis is 20% debt and 80% equity. The prevail- ing yield on debt of similar credit risk is estimated at 3.5%. Based on a marginal corporate tax rate of 37%, the after-tax cost of debt is 2.2%. The cost of equity for Chestnut is estimated at 82% based on the CAPM with a beta of 0.9, a market risk premium of 6.0%, and a risk-free rate of 2.8%." Based on these estimates, the WACC is 7.0%. alternative model that uses a market risk premium of 9% and a risk-free rate of 0.1% gives a smlar costd equity estimate EXHIBIT 14.3 Capital Market Data, December 2013 Yield 30-Day Treasury Bill 10-Year Treasury Bond 10-Year Corporate Bonds of Industrial Companies 0.1% 2.8% 2.8% 2.9% 3.2% 3.3% 3.5% 3.8% 4.1% 4.6% 5.8% 6.5% 6.5% 6.8% 8.4% 9.0% Historical Market Risk Premium Equity Market Index Less Government Debt) 6.0% Data source: Bloomberg, case writer estimates Financial Data for Industry Comparables, December 2013 (dollar figures in XHIBIT 14.4I S&P Bond Rating Equity Beta Total Equity (Book Value) Total Equity (Market Value) Total Debt 0.90 Chestnut Foods 461 1,544 1,840 Food Processing Boulder Brands Campbell Soup ConAgra Foods Diamond Foods Flowers Foods General Mills Hormel Foods Kellogg J. M. Smucker Tyson Foods 0.55 0.60 0.70 0.75 0.50 0.55 0.65 0.60 0.70 0.80 298 4,832 9,590 593 923 8,645 250 7,358 2,241 1,942 355 1,349 5,472 167 1,076 6,633 3,311 3,545 5,168 6,285 958 13,223 13,805 578 31,245 11,759 21,841 10,904 11,469 Instruments Badger Meter Dresser-Rand Flowserve Honeywell Idex Measurement Specialties Mettler-Toledo Wendell Instruments 1.06 1,287 1,200 8,829 774 129 413 197 1,297 1,870 17,467 1,573 723 4,549 10.767 74,330 5,933 944 7,154 230 1.30 1.25 1.35 935 0.52 NA dentifies bond ratings that are estimated by case writer (continued) Comparables, December 2013 (dollar figures Financial Data for Industry in millions) (continued) EXHIBIT 14.4 1 Company Description Food Processing Boulder Brands Food products focusing on health and weliness, including gluten-free, diabetic-friendw and low-fat offerings such as soy milk, buttery spreads, snack bars, and entre alternatives; based in Boulder, CO. food products; based in Camden, NJ Campbell Soup ConAgra Foods Condensed and ready-to-serve convenience Consumer temperature classes; based in Omaha, NE. and commercial food products across frozen, refrigerated, and Packaged nuts and snack products for consumer and commercial channels; based in San Francisco, CA Diamond Foods Flowers Foods General Mills Baked goods for warehouse and direct-to-store delivery based in Thomasville, GA Branded and unbranded food products for consumer and commercial distribution; based in Minneapolis, MN. Fresh and refrigerated meat, snack, and speciaty food products for retail and food service distribution; based in Austin, MN. Hormel Foods Ready-to-eat cereals and convenience food products; based in Battle Creek, M Coffee, fruit spread, beverage, and specialty food products for retail and wholesale distribution; based in Orrville, OH. Fresh beef, pork, and chicken, and related prepared food products for retail and wholesale distribution; based in Springdale, AR Kellogg J. M. Smucker Tyson Foods Instruments Water meters for municipal water utilities; pipeline flow measurement for food and beverage, pharmaceutical, utility, and HVAC industries; based in Milwaukee, WI Rotating equipment for oil, gas, and petrochemical industries; based in Houston, TX Pumps, valves, seals, and boiler systems for petroleum, chemical, water, mining, pharmaceutical, and other industries; based in Irving, TX. Electric controls, surveillance, monitoring, and associated software for defense, air traffic control, utilities, and industry: based in Minneapolis, MN. Pumps, flow measurement for food, chemical, industrial, and energy industries; pumps, air compressors, and optical components for health, scientific, defense, and aerospace applications; based in Lake Forest, IL. Equipment sensors for vehicle, medical, home appliance, aerospace, and industrial applications; based in Hampton, VA Weighing, chemical, and assorted laboratory instruments for food retail, industrial and scientific research applications; based in Columbus, O Control and monitoring instrumentation for fast-food restaurants: young based in Tucson, AZ Badger Meter Dresser-Rand Flowserve Honeywell Idex Measurement Specialties Mettler-Toledo Wendell Instruments company Data source: Bloomberg. Yahoo! Finance, Value Line, and case writer estimates