After calculating the cost of equity, the cost of debt of each company is identified which is also available for each company. Moreover, the book value of debt is also available and market value of equity is calculated by multiplying the outstanding shares of each company with their respective per share prices. By putting these values into the WACC formula, the weighted average cost of capital for each company is calculated which is 7.7% for Kraft Company, 8.4% for DelMonoto Company and 6.425% for Campbell Company.
The WACC of Heinz Company for the year 2010 is 9.7%, which is highest among all competitors. This shows that investors of Heinz Company are demanding greater return as compared to its competitor’s investors. However, the calculation of WACC for each company is based on certain assumptions like for Heinz food, Kraft Company’s beta is used and risk free rate and market premium rate are also based upon assumptions. Nonetheless, approximately same assumptions are used for the calculation of WACC of other three companies. Therefore, the WACC of Heinz is clearly overestimated as compared to its competitors WACC.
How Does One Value an Entity Whose Primary Asset Is Goodwill and the Leases/ Rights to Produce Events
The Entity which uses goodwill and leases as a primary assets, then the calculation of the weighted average cost of capital for that company could be unrealistic as including goodwill and leases into the assets could decrease the value of debt and could increase the value of assets.
The value of cost of capital is dependent on the debt and equity and wrong adjustment of goodwill and leases into the assets could overestimate the value of company by increase its share price and value of equity and could wrongly estimate the value of WACC.
How Does One Create and Then Attribute Value To a “Brand” Such As the Pro Cycling Tour
The brands such as Pro Cycling Tour could create value by crating threshold values. By adding value adding activities and by removing non value adding activities, one could create value to a brand. Moreover, for this purpose an effective brand strategy is required like differentiation, innovation and focus which could encourage the buyers to buy its products.
Once a brand is formed and it achieves threshold competencies as compared to its competitors, then value could be attributed to a brand due to its different and promising products as compared to its competitors.
How Much Is Threshold Worth Based On either an Asset Valuation or a Discounted Cash Flow Valuation
The valuation of a private medium sized firms could be done in two parts; one part consist of valuation of assets or valuation of discounted cash flowsand second part contains adjusting some value above the asset valuation or discounted cash flow valuation by incorporating the risk and time factor of the business. It is called threshold value that a business can earn upon its net assets against its brand name or good will.
As the business will be aged and will create loyalty about its brand, then its good will become higher, therefore the value of the business will also be high. It could also be the tendency of attracting customers due to its unique and differentiation strategy as compared to its competitors, which provides the business a competitive advantage over competitors.
Most appropriate Financing
Threshold worth based upon asset valuation is considered as most suitable as it measures the goodwill on current and non-current assets of the company and threshold worth based upon asset valuation gives the economic worth of the assets of the company. Threshold is the competency, which is difficult to imitate and to provide a competitive and threshold advantage over competitors. Therefore, the tendency of a business to provide threshold advantage over its competitors could be better estimated by asset valuation and then adding an intrinsic value over its assets in order to incorporate the risk and time value of the business. The older the business will be, the greater the value it will give. Moreover, low risk environment will also strengthen the goodwill of the company……………………………
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