Harris Seafood Answer the following questions a. Should Harris Seafood enter the shrimp processing business by building the new plant? Please assume the firm will be unTABLE to use the Industrial Revenue Bond financing mentioned at the end of the case (we will return to this topic in a later case). Yes, I think that this company should build a new plant that allows them to grow in the industry, even if they are unTABLE to use the Industrial Revenue Bond, they will have other financing alternatives.
Instead of Industrial Revenue bonds, Harris Seafood can use conventional bonds; which they are going to reduce De NP. Although it can use bank moans, the NP will decrease. The company can financed the new plant with only debt or only equity, If they use the debt to finance the NP will increase because KDE
Underlying economics: -(Demand of shrimp uncertain) As we know U. S. Economy was on recession on this years, In 1975 the tax rate was the highest since 1 947; the unemployment rate was extremely high (6%). The average of the Treasury Bills from 1970-1980 was 7. 08%. Despite the economic conditions, analyzing the Income statement and Balance sheet with an inflation of 11%; I think that the purchase of a new plant is a good long term investment which will start generating profits year after year while the country’s economy is recovering.
We will begin to see how economic and sales growth will gradually increase, which will allow us to recover the investment and make a profit, this is the reason why I would approve this project , in conclusion I think that the NP will be positive. Ii. What are the specific sources of value, and how important are they? We need to considers all the assumptions, so we can calculate the Free scofflaws and the NP of the Project. Also we need to calculate the CAMP to finally obtain the WAC. I am going to use the WAC to discount the Free Cash Flows.
As I mentioned before, we should consider all possible alternatives: Industrial revenue Bonds Bank loans Conventional bonds Debt Financing Equity financing, etc. All these alternatives will have different impacts in the NP. We should Exhibit 6 with Exhibit 7, because the last one considers an inflation f 1 1%; also Exhibit 8 can help us to obtain the Arm and Ref. Iii. Prepare a basic discounted cash flow analysis; I. E. Compute incremental cash flows and a terminal value, and discount them at a weighted average cost of capital.
Can you do a multiples-type analysis here as well? Harris Seafood should make an investment on the new shrimp plant because the NP of the Project Also this scofflaws also depend on the financing alternative we choose. In this case I used the Industrial Revenue Bond. “Multiple-type analysis is a method of estimating the value of an asset by comparing it to the values assessed by the market for similar or comparTABLE sets. For using valuation with multiples we need to: 1) Identifying comparTABLE assets and obtain market values for these assets. ) Converting these market values into standardized values. This process of standardizing creates valuation multiples. 3) Apply the valuation multiple to the key statistic of the asset being valued, controlling any differences between asset and the group that might affect the multiple” 1 . Think we can make a valuation with multiples having several advantages and analysis facilities; likewise we can easily compare Harris Seafood with other companies in this industry. Also ratios are good sources of general industry information.
There are some disadvantages for this analysis in this sector because for example: the food and beverage ratio index, it will include companies that make prepared food and some that are distributors. In cases like this the oratorios would be distorted; in this cases it’s better to use another analysis method. Iv. How can you apply the ComparTABLE Valuation Framework here? Along which dimensions must one identify comparTABLE firms? How reasonTABLE is the comparability assumption? I think it is important to compare with competitors to know our place in the industry. In this case we see how the company has a large participation in the market.
We also know that economic conditions in the country have been unfavorTABLE and had affected all sectors. We should always compare our company with the best in the market; and with others who have a similar participation, size, sales, etc. All companies have: Objective Value Subjective Value Functional Value Value vs.. Prices Equity valuation vs.. Firm valuation, etc. B. Compare the weighted average cost of capital you used above to the cost of unleavened equity for the shrimp processing plant. By how much do these two rates differ? Which is higher? Is this sensible? What accounts for the difference?
We can observe that our Beta levered y higher than the beta unleavened, on the other hand obviously our cost of equity is bigger when we use the Buy. In the next TABLE we can compare both, Betas and eek. Also we can see the change (delta), how this rates differ. As it is shown they are very sensible to changes and they differ a lot; this numbers can change all the components, and also the WAC. It is important to mention that discounted all the scofflaws using the weighted average cost of capital, so if we want to calculate De WAC also we will have another NP of the Project.