B. Determine your estimate of the return on Heinz debt (rD). Include in your analysis the following
Question:
B. Determine your estimate of the return on Heinz debt (rD). Include in your analysis the following steps (points will be given for each step mentioned below as well as the final conclusion): 1) Determine the yield (YTM) of the 2032 bond (it redeems $100) using the price of that bond in 2009 (assume exactly 23,5 years till maturity) 2) Argue, based on the information you have on this Heinz bond, how the interest rates in the market must have changed between 2009 and 2010. Is this consistent with the information in the table above (titled 'Average historical Yields')? 3) Analyze the pattern in the difference between Aaa and Baa (Moody's way to denote AAA and BBB) bonds over the years (so look at the spread between the categories). Comment on the magnitude of these differences in 2009 and 2010 compared to the long-term average. Finally, argue if this analysis would be relevant for which level of leverage Heinz would target. 4) Argue which number you would use for rD in a WACC calculation (and give that number). Also include if your estimate would differ based on the length of the period you're using the WACC (e.g. a project lasting 1 year, or a perpetuity).
Entrepreneurial Finance
ISBN: 978-0538478151
4th edition
Authors: J . chris leach, Ronald w. melicher