Hersey

| Hersey Corporation |

Memo

To: Hersey Trust Company

From:

Date: [ 4/20/2012 ]

Re: Valuation of Hersey Foods Corporation (HSY)

We were tasked with valuing Hersey Foods Corporation as a stand alone company by using two methods. In order to evaluate the organization we calculated the free cash flows in order to determine the terminal value in 2011. In order to do this we subtracted the total financing activities from the NOPAT of each year. In order to calculate the terminal value of Hersey Foods Corporation, we considered two methods, the idustry multiple model and the constant growth model. The industry multiple average is 20.45, which was calculated from Exhibit 11 in the case. From our forecast of EBIT in 2011 of $1,125.4 million in 2011, the value of the oranizational terminal value is $23,013.8 million. This is an unrealistice value since the market calls for stagnent growth over the next 10 years in the confectionary market segment.

Based upon that result, we chose to use teh constant growth model using the Gordon Formula with a growth rate of 0.5% and a WACC of 6.48% and calcualted the terminal value to be $9,104.83 million. The WACC is based on a cost of det of 5.32%, which is calculated by using the average yield of Hersey Foods Corporation’s long-term debt and dividing it by the tax rate of 39.71%. The cost of equity was calculated usind the CAPM method. Based upon our 10 year forecast, the risk-free rate we chose to use was the US Treasury 10 year yield curve of 3.82%. We used the given beta of .55% and the market risk premium of 5.5%, and calculated the cost of equity to be 6.85%. We next calculated the NPV to be $7,690.12 million. We calculated this using the discounted sum of the free cash flows for our 10 year period, and using the WACC as the discount rate. The next step we were asked to undertake was to calculate shareholder value, we did this by subtracting the market value of the debt, $884.9 million, from the NPV we...