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Category: Book Review

Subcategory: Finance

Level: Academic

Pages: 5

Words: 1375

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Introduction
Hershey is a North American company that deals with the manufacture and marketing of chocolate, confectionaries and grocery products. The company was founded by Milton S. Hershey in 1894 making it one of the oldest chocolate manufacturers. Currently, Hershey has operations in some countries across the globe and is listed on the New York Stock Exchange. Its current president and CEO is John P. Bilbrey with a staff count of approximately
15,000.
Methodology
Generally, the capital structure shows different sources of funding that a company uses to finance its operations and growth. Most of the information used in calculating WACC have been sourced from: Hershey Company Website, the Company’s annual report date February, 2015 and Yahoo Finance.
A capital structure entails: Long-term debt, short-term debt, common equity and preferred equity.
Using the company’s capital. The weighted average cost of capital (WACC) can be calculated. WACC is used as an investment decision-making tool in company’s project evaluation. Using WACC; projects of the same risk can be evaluated, the viability of a project can be measured by comparing the project’s rate of return and the WACC. It represents the average risk faced by the organization.
Calculation I
We will first calculate the weight of equity (weight of common and preferred equity) and weight of debt (wd)
Weight of equity = weight of common equity,(ws) + weight of preferred equity(wp)
wd + ws + wp = 1
Given that wp = 0
wd + ws = 1
Weight of debt, Wd = book value of debt, D/ (market value of equity, E + book value of debt, D)
From the FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY table the company’s:
Book value of debt = $ (635,501,000 + 1,548,963,000)
= $ 2,184,464,000 = $ 2184.464 Million
Market value of equity = $21,180,575,000 = $21,180.575 Million
a) Weight of debt, wd = 3,484,610/(6,220,685+3,484,610) = 0.36
Wd + Ws + wp = 1
Ws + Wp = 1 – wd = 1 – 0.36 = 0.64
Wd = D/ (D + E) = 2,184,464,000 / (2,184,464,000 + 21,180,575,000) = 0.0935
b) Weight of equity, Ws = 1 – Wd = 1 – 0.0934 = 0.9066
Calculation II
Cost of debt and cost equity
a) Cost of equity
Using Capital Assessing Pricing Method (CAPM)
Cost of equity = Risk – Free rate of return + Beta of asset * (Expected Return of the market – Risk-Free rate of return)
In this calculation, a 10-year Treasury Constant Maturity is used as the Risk-Free. It is up to date. The current risk-free rate stands at 2.12%.
Beta is volatile of the expected excess market returns. The company’s beta is 0.82
The market premium (Expected Return of the market – Risk-Free rate of return) is 7.5
Cost of equity = 2.12% + 0.82 * 7.5% = 8.27%
Using Dividend Method
Hershey has a dividend payout of 2.26%. Equity return = 14.33%. Current dividend of $ 2.04 per share.
We calculate g.
g = (1 – 0.0226) * 14.33
Cost of equity = $ 2.04 (1 +0.139 )/ $103.5 + 0.139 = 0.16 = 16%
b) Cost of debt
The cost of debt is the year-end interest divided by the cost of debt. As of December 2014, the interest expense was $ 87.598 Mil. It’s total book value for that year was $ 2184.464 Mil
Cost of debt = 87.598/2184.464 = 0.0401005 = 4.01%
The latest average rate of return is 34.79%
WACC = wd * rd (1 – T) + wp * rp + ws * rs
= 0.36 * 0.0401 (1 – 0.3479) + 0.64 * 0.0827
= 0.0094137 * 0.052928 = 0.0623417 = 6.23%
Conclusion
As of February, 2015, the weighted average cost of capital for Hershey Company is 6.23%. The Hershey Company generates higher returns on investment than it costs the company to increase the capital needed for that venture. As the company continues to generate positive excess returns on the investments, this will increase its value of growth. This is because WACC is lower compared to the returns of the investment that is 23.07%. The weights show that the company is raising more of its additional operational costs from equity than debts.
Appendix
Hershey Co. Balance Sheet at 31st December, 2014
CONSOLIDATED BALANCE SHEETS (USD $) Dec. 31, 2014 Dec. 31, 2013
In Thousands, unless otherwise specified Current Assets    
Cash and cash equivalents $374,854 $1,118,508
Short-term investments 97,131 0
Accounts receivable – trade, net 596,940 477,912
Inventories 801,036 659,541
Deferred income taxes 100,515 52,511
Prepaid expenses and other 276,571 178,862
Total current assets 2,247,047 2,487,334
Property, Plant and Equipment, Net 2,151,901 1,805,345
Goodwill 792,955 576,561
Other intangibles 294,841 195,244
Other assets 142,772 293,004
Total assets 5,629,516 5,357,488
Current Liabilities    
Accounts payable 482,017 461,514
Accrued liabilities 813,513 699,722
Accrued income taxes 4,616 79,911
Short-term debt 384,696 165,961
Current portion of long-term debt 250,805 914
Total current liabilities 1,935,647 1,408,022
Long-term debt 1,548,963 1,795,142
Other long-term liabilities 526,003 434,068
Deferred income taxes 99,373 104,204
Total liabilities 4,109,986 3,741,436
Stockholders’ Equity    
Preferred stock 0 0
Common stock 299,281 299,281
Class B common stock 60,620 60,620
Additional paid-in capital 754,186 664,944
Retained earnings 5,860,784 5,454,286
Treasury-common stock shares, at cost -5,161,236 -4,707,730
Accumulated other comprehensive loss -358,573 -166,567
The Hershey Company stockholders’ equity 1,455,062 1,604,834
Noncontrolling interests in subsidiaries 64,468 11,218
Total stockholders’ equity 1,519,530 1,616,052
Total liabilities and stockholders’ equity $5,629,516 $5,357,488
Long-term debt consisted of the following
December 31, 2014 2013
4.85% Notes due 2015   $ 250,000     $ 250,000  
5.45% Notes due 2016 250,000 250,000 1.50% Notes due 2016   250,000     250,000  
4.125% Notes due 2020 350,000 350,000 8.8% Debentures due 2021   100,000     100,000  
2.625% Notes due 2023 250,000 250,000 7.2% Debentures due 2027   250,000     250,000  
Other obligations, net of unamortized debt discount 99,768 96,056 Total long-term debt   1,799,768     1,796,056  
Less—current portion 250,805 914 Long-term portion   $ 1,548,963     $ 1,795,142  
Work Cited
Http://www.thehersheycompany.com