Harris Seafood

1107 Words Nov 7th, 2011 5 Pages
| |Harris Seafoods Inc. |

Memorandum

To: Mr. Charlie Harris II, CEO

From: student 103

CC: Professor

Date: 11/22/11

Subject: Harris Seafoods Inc.: Processing Plant Project Analysis and Recommendation

Your immediate attention is requested. We would like to take this opportunity to discuss our team valuation of accepting Processing Plant Project. We value that Harris Seafoods has evolved into one of the largest producers of frozen shrimp in the United States. We are impressed by company’s remarkable high return on equity of 39% after-tax. Our analysis of the Processing Plant
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Please be advised that 1.25 beta for Harris Seafoods equity, but we acknowledge that true beta of the project is uncertain because of finding a market portfolio with similar risk is hard to find. In addition, the Return on Equity at 15%, we took the discount rate and applied it to the Free Cash Flows to get a Net Present Value. The Internal Rate of Return of the project was 15%. To compensate Harris Seafoods for the opportunity cost and risk of not investing in lowest required rate of return plus risk premium for individual’s required rate of return, we will use WACC of Harris Seafoods.

Our Recommendation:

We recommend based on economical analysis determines that accepting processing plant project is not viable to meet the minimum required rate of return set by the Harris Seafood Inc. for shareholder’s equity. Your concerned about accepting this project would reduce the company’s high rate of return on invested capital is absolutely correct after this analysis. The Free Cash Flow provides a possible scenario of receiving certain principle and interest payments that Harris may receive. Please be advised that our Cash Flow projects and forecast provides great uncertainty, consequently we compensate that uncertainty with the discount rate of 15%, the higher discount rate resulted in lower present value which

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