Reference no: EM132386184

The case asks me to estimate WACC for Heinz in 2010, so I need to estimate the cost of equity, but the case gives me 4 alternatives of market risk premium and I don't know which one to use and why. Below is the paragraph about market risk premium.

"What most surprised Sheppard was the diversity of opinions he obtained regarding the market risk premium. Integral to calculating the required return on a company's equity using the capital asset pricing model, this rate reflected the incremental return an investor required for investing in a broad market index of stocks rather than a riskless bond. When measured over long periods of time, the average premium had been about 7.5%.6 But when measured over shorter time periods, the premium varied greatly; recently the premium had been closer to 6.0% and by some measures even lower. Most striking were the results of a survey of CFOs indicating that expectations were for an even lower premium in the near future-close to 5.0%. On the other hand, some asserted that market conditions in 2010 only made sense if a much higher premium-something close to 8%-were assumed".