Hershey Chocolate in Two Flavors: Kd and Ku

Abstract

In Consistency in Chocolate: A Fresh Look at Copeland's Hershey Foods & Co Case we showed the inconsistencies regarding the assumption of constant leverage and the inconsistency in the values for equity calculated with different approaches. In this second part we show the differences in the calculated values using an approach consistent with the assumptions implicit in the calculation of Copeland et al. (1995)'s Hershey example. In particular, we show the calculation of the levered value for the firm using the proper calculations for WACC and cost of levered equity assuming that the discount rate for the tax savings is Kd, the cost of debt and using finite cash flows. In this paper, we use the terminal value calculated in the original example. We also calculate the levered values assuming that the discount rate for the tax savings is Ku, the cost of the unlevered equity and using finite cash flows. We calculate the differences in values and show the consistency of our approach regarding the calculated values for equity. This paper is aimed to those who have learnt valuation with that edition (1995).

Keywords: Cash flows, free cash flow, cash flow to equity, valuation, levered value, levered equity value, terminal value, cost of levered equity, cost of unlevered equity, tax savings, cash flows, Copeland, Hershey

JEL Classification: M21, M40, M46, M41, G12, G31, J33