Harris Seafood
Answer the following questions
a. Should Harris Seafoods enter the shrimp processing business by building the new plant? Please assume the firm will be unable 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 unable to use the Industrial Revenue Bond, they will have other financing alternatives.
Instead of Industrial Revenue bonds, Harris Seafoods can use conventional bonds; which they are going to reduce de NPV.
Although it can use bank loans, the NPV will decrease.
The company can financed the new plant with only debt or only
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I am going to use the WACC to discount the Free Cash Flows.
As I mentioned before, we should consider all posible alternatives:
Industrial revenue Bonds
Bank loans
Conventional bonds
Debt Financing
Equity financing, etc.
All these alternatives will have different impacts in the NPV.
We should Exhibit 6 with Exhibit 7, beacuse the last one considers an inflation of 11%; also Exhibit 8 can help us to obtain the Rm and Rf.
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 NPV of the Project >0.
Also this cashflows 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 comparable assets. For using valuation with multiples we need to:
1) Identifying comparable assets and obtain market values for these assets.
2) 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.
I think we can make
You have standardized value and customized value. Standardized value deals with its face value. Customized value centers around what its made of to make in valuable. Value is hard to distribute because everyone has their own idea what is important. Stone uses the example of an education.
d. price is what we must pay and value is what we are willing to pay.
In determining the FMV of both classes of NYC medallions, we analyzed the various methodologies for calculating the estimated value of the medallion and found the approach used in this report, the income approach, to be the most concrete based on factual data to render this type of assessment. As such, the analysis in this report is limited to, and only should be adopted holistically with, the pertinent qualifying parameters.
Step Three: Draw out a timeline, and then take the present value of all cash flows
For the purpose of calculating the net present value of the project, an appropriate cost of capital has to be calculated at which free cash flows of the project should be discounted. Since the project will be solely financed by selling new shares, cost of equity will be used as the discount rate. Beta for the company can be assumed to be equal to average of the betas of the competitors of the company. This average beta value comes out to be 1.2. Risk free rate is 0.17% while risk premium has been estimated to be 6%. Thus by putting these values in CAPM formula, we can find the cost of equity for the company which is 7.39%.
Tucker should invest in this project based on Gates’ projections with NPV above 450K and 84% IRR. If we assume a growth rate of 2% beyond year 2011 and COGS 30% of the revenue, we still get NPV of $383,920.4. Based on these calculations, we would recommend Tucker Hansson to invest in the project.
Given the changes in Red Lobster’s strategy over the past few years and the surprising ability to attract new, “experiential” customers, it our recommendation that they modify their strategy to focus on pursuing this type of clientele. We will go into further detail momentarily; however, the reason for focusing on the experiential customer group is that Red Lobster has the opportunity to increase revenue and net operating income at each restaurant by 20% or more. Granted, these are enormous gains and it will take a few years to realize their full potential, but for the reasons laid out below, we believe these gains are a realistic possibility.
At 30 June 2014, the balance of the revaluation surplus is $400 000, of which $300 000 relates to the factory land and $100 000 to the buildings. On this same date, independent valuations of the land and building are obtained. In relation to the above assets, the assessed fair values at 30 June 2014 are:
Comments from teacher: In question 1, why do we use these equitation’s, explain and show then, i.e. ROE can go up with more leverage. More on comparables. In Q1 assumptions explained, that are then used in DCF. Max for question 1 and 2, two pages. Must power to put in Q3. Deduct tax in table 3. In DCF, show more how calculated and assumption missing about other income and corporate expenses. Table 6 to be fixed (already been done). Skip in DCF advantage and disadvantage. Do table 4 different, use Exhibit 11, value range, use median value and calculate enterprise value with multiples en deduct net debt 318,5 and get equity value. Explain better in main text footnote 12. . Use
James Gitanga was not sure about the unusual capital structure of the Company, avoiding the long-term debt. We believe that the long-term capital structure across the industry was pre-determined by the high capital expenditures and steady cash inflows. Thus, issuing long-term debt was more preferable. Besides, by issuing debt they would enjoy the tax shield since interest on long-term debt is tax-deductible.
Furthermore, some of these values,
Value: An object, product or service that: has utility or usefulness, Is scarce, Is desired by people (is in demand),Is transferable from one person to anotherLand Appraisal Methods: Market or Direct Sales Comparison, Allocation, Abstraction, Development, Land Residual
According to Aswath Damodaran, relative valuation is the most widely used technique in sell side research at investment banks. Relative valuation is the concept of using multiples and comparing the value of an asset to a similar asset in the market. Purchasing a house uses concepts of relative valuation. Houses are priced by comparing other houses that have similar specification within the same neighborhood.
The science is performing each valuation correctly, the art is using each method to develop a recommendation