Chestnut Food Case Solution and Analysis, HBS Case Study Solution & Harvard Case Analysis PDF

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8/27/2019

Chestnut Food Case Solution and Analysis, HBS Case Study Solution & Harvard Case Analysis

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Chestnut Food Case Solution What is an appropriate required rate of return (hurdle rate) for Food Products and Instruments? How did you get it? (Hints: you may want to use the capital asset pricing model (CAPM) to estimate the cost of equity) In order to use appropriate capital budgeting, hurdle rate is the minimum rate that a company expects to earn when investing in any particular project. The expansion of the instrument division requires Chestnut Foods to raise the funds of one billion dollars. However, the management of Chestnut foods is confused because ofthe calculation of hurdle rate. In order to address the confusion caused by this hurdle and to nd appropriate hurdle rate for the food production and instrumental division,according to the calculation, the hurdle rate for the food product is 3.23% and 6.52% for the instrument division. On the basis of this calculation, the CEO of the company has to invest in instrument division.The reason for this is that WACC of instrumental division is higher than the food product division. The company will get higher return from this division than product food division. The food product division of the company has stable sales and there is no risk.Along with that, the beta of the company is lower than the market beta,which is 1. This shows that company is not risky. In order to calculate the beta of the both divisions, the sales of the food product division are stable,this means that this division has not business risk.However, the company can face nancial risk by getting loan, so that’s the reason we estimated 60% debt ratio and 40% equity ratio in this division, while the instrumental has 40% debt and 60% equity. As the capital structure of both divisions changed, the beta of both divisions will change it as well and it will aect the cost of equity and hurdle rate.

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Chestnut Food Case Solution and Analysis, HBS Case Study Solution & Harvard Case Analysis

The cost of equity is found out by using the CAPM Capital Assets Pricing Model, the formula of CAPM is (risk-free rate + beta*(market risk premium). 

`WACC

Food Processing



market risk premium

9%

risk-free rate

0.1%

debt ratio

60%

equity ratio

40%

tax rate

37%

cost of debt

2.20%

cost of equity

4.8%

WACC

3.22%

WACC Instruments



market risk premium

9%

risk-free rate

0.1%

debt ratio

40%

equity ratio

60%

tax rate

37%

cost of debt

2.20%

cost of equity

9.4%

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Chestnut Food Case Solution and Analysis, HBS Case Study Solution & Harvard Case Analysis

WACC

6.52%

What is the better proposal, Pederson’s or Van Muur’s? What should Pederson do? The proposal by Van Muur is to sell the instrument division and diver the company’s focus only on a single direction. The proposal might result in increase of the share price of the company, as the management will have to look after one single division that helps them to make eective decisions for the company. The selling of the instruments division might have a negative impact on the company’s image and the stock price. The CFO of the company should not sell the company’s instruments division, the reason for this is that it is a major source of the revenue for the company. Along with that, the food product division requires a number of food processing machinery that accounts for 20 percent of the instrument division sales. The food products division has to either import or buy the machinery from other companies, which might result in a loss to the company’s income…………………….. This is just a sample partial work. Please place the order on the website to get your own originally done case solution

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