Kraft provides a forecast of growth for two years, based on pre-bid activity and plans. These forecasts provide an average annual growth of 12% in revenues. In a letter to shareholders, Kraft's CEO cited a 20% compound rate of growth over the five years preceding the bid. Based on Kraft's ability to exceed the food index, S&P, and industry peers, the projected growth of 12% appears reasonable for a valuation. In the long term, it will be difficult to sustain such a lead over the market and as a result, the growth rate is expected to drop by a few points.
Risk Free Rate and Market Risk Premium
In 1987, the yield on a 10 year treasury bond was 8.39% (Federal Reserve, 2003). This is the rate used as the risk free rate. The market risk premium is set at 5.5%. This is based the fact that over the period 1926 - 2001, stocks have outperformed long term treasury yields by just over 5% (Ibbotson, 2003).