ROPI Valuation Model · WACC Estimation · 5-Year Financial Forecast · Sensitivity Analysis
Determine whether The Hershey Company (NYSE: HSY) is fairly valued by the market. With HSY trading at $168.52 at the time of analysis, the team needed to build a rigorous bottom-up valuation from historical financial statements, forecast future performance, and quantify the cost of capital — then compare the model's intrinsic estimate against the observable market price.
Built a full financial model in Excel spanning 10 years of audited balance sheet and income statement data (2014–2023). Used ROPI (Residual Operating Profitability Income) methodology for intrinsic valuation, estimated WACC using CAPM with a Moody's A1 default spread, and constructed a 5-year forecast using normalized income statement and balance sheet ratios. Completed sensitivity analysis across sales growth, WACC, and terminal growth assumptions.
Hershey's WACC was estimated at 5.61%, reflecting a low-beta, investment-grade consumer staples company with predominantly equity financing.
| Input | Value | Source / Notes |
|---|---|---|
| Risk-Free Rate | 4.43% | 10-Year U.S. Treasury Yield |
| Beta (β) | 0.28 | Yahoo Finance — low volatility vs. market |
| Market Risk Premium (MRP) | 5.00% | Standard assumption from course framework |
| Cost of Equity (Re) | 5.83% | Re = Rf + β × MRP = 4.43% + 0.28 × 5% |
| Moody's Credit Rating | A1 | Investment grade — low default risk |
| Default Spread | 0.77% | Damodaran default spread for A1 rating |
| Cost of Debt (Rd) | 5.20% | Rd = Rf + Default Spread = 4.43% + 0.77% |
| Statutory Tax Rate (Tc) | 21% | U.S. Federal Corporate Tax Rate |
| Equity Weight (E/V) | 87.04% | Market cap $34.25B / Total capital $39.36B |
| Debt Weight (D/V) | 12.96% | Total debt $5.10B / Total capital $39.36B |
| WACC | 5.61% | (E/V) × Re + (D/V) × Rd × (1−Tc) |
Ratios derived from 10 years of audited financial statements, used as anchors for forecasting normalized future performance.
| Line Item | Assumption | Basis |
|---|---|---|
| Revenue Growth | 2.0% / year | Normalized from HSY 5-year historical CAGR |
| COGS % of Sales | 52.68% | 2024 actual ratio; held constant |
| SG&A % of Sales | 21.19% | 2024 actual ratio; held constant |
| Terminal Growth Rate | 1.0% | Conservative long-run nominal GDP assumption |
| Tax Rate | 21% | U.S. Federal statutory rate |
| 2024E Net Sales | $11.202B | Actual reported — used as base year |
| 2029E Net Sales | $12.368B | 5-year at 2% annual growth |
The Residual Operating Profitability Income (ROPI) model values the firm by discounting future residual operating income above the cost of capital, then adding the present value of the terminal period.
Tested intrinsic value across variations in sales growth (1%–3%), WACC (4.61%–6.61%), and terminal growth rate (0.5%–1.5%). All scenarios point to significant undervaluation relative to the observed market price.