Harris Seafood Case

1486 WordsSep 16, 20116 Pages
Harris Seafood Question Number One (1) Value the processing plant proposal. Ignore the Industrial Revenue Bond financing. Assume: Market Risk Premium 8.8%, Riskless Rate 11.41%, and Harris Long Term Debt Rate 13.5%. Our approach to valuing the processing plant can easily be decomposed into three distinct steps first, find the value of the foreseeable free cash flows. Next, calculate the terminal value of the project. Finally, take the present value of those flows. The next few paragraphs walk through each of these steps in order of progression. In the first step we analyze the data and calculate the free cash flow from the inception of the project to the foreseeable future. We opted to use Exhibit 7, which incorporates an 11%…show more content…
Since this project is a going concern, the levered terminal and present values are calculated using the weight average cost of capital (WACC) as the discount rate, which we calculate to be 16.17%. Step Three: Draw out a timeline, and then take the present value of all cash flows Discounted Cash Flows | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | TerminalIn 1986 | $4,942.28 | (10,035.00) | (2,621.00) | (4,256.00) | (458.00) | 1,803.00 | 1,998.00 | 2,246.00 | 45,795.69 | Question Number Two (2) Is the pro-forma statement in Exhibit 7 credible? Why or why not? We do not think the pro-forma statement in Exhibit 7 is credible. 1. The case explicitly discusses the volatility inherent in consumers’ demand for shrimp, pointing out that consumers are likely to forego shrimp entirely or substitute it with a less expensive product. In spite of this economic sensitivity, Exhibit 7 and Exhibit 6 (the 0% inflation scenario) show the exact same consumption of shrimp each year. 2. Management has no experience in this industry. Shifting the organization away from shrimping and into a processing plant will require a highly skilled management team and the Exhibit does not indicate that any new senior hires will be brought on board to help manage the new plant. This undermines our ability to rely on the forecast as a whole. 3. Exhibit 7 applied an 11% inflation rate to every single financial line throughout the
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