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Case 14: Chestnut Foods

In 2014, the stock performance at Chestnut Foods had failed to meet expectations for several years.
Van Muur bought 10% of Chestnut, sought seats on the board, and a new management direction.
Food Products Division: The Food Products Division provided products related to the bread and sandwich market for
institutional food services and retail grocery distribution.
The Instruments Division produced equipment and automation support for food producers in North America.
Investors expect returns that beat the cost of capital of 7%
Questions
1. Summarize the performance of the Food Products Division and the Instruments Division.
2. What should Pedersen do ?
Meyer's drawing in Figure 1 is an appropriate characterization of risk-adjusted performance in that most estimates
of the cost of capital for the Food Products Division put it below the expected return
of 6.3%. And most estimates of the cost of capital for the Instruments Division put it above the expected return of 7.7%.
Economic profit = (Expected Return on Capital - Weighted Average Cost of Capital)*Total Division Capital

Food Products Division


-$26,564,923.91
Instruments Division
-$2,984,967.39
See Pages 214 and 215.
Cost of equity rf + beta*(rm-rf)
8.20%
Cost of debt before tax cost of debt*(1-tax rate)
8.19%
WACC
debt/capital * cost of debt + equity/capital * cost of equity
0.0819749457 8.20%

Expected Economic Return


Food Products Division 6.30%
Instrument Division 7.70%

Expected Economic Profit


Food Products Division Profit $ (504,067.99)
Instrument Division Profit $ 14,850.05
Overall Profit $ (489,217.94)
andwich market for

rth America.

at most estimates

xpected return of 7.7%.