Harris Seafood Case
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% inflation rate throughout most of the data. While this may seem like a high inflation level in today’s environment, given the time of the case and the most recent economic data, namely the 18.2% annualized increase in consumer prices reported in Exhibit 8, this seems to be much more reflective of the environment than the alternative that was available to us, Exhibit 6, which assumes a 0% inflation rate.
Step One: Determine Free Cash Flow for the Foreseeable Future Free Cash Flow Analysis | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | Earnings Before Interest, After Tax | 0 | (189) | 2,152 | 3,702 | 4,233 | 4,829 | 5,493 | + Depreciation | 0 | 833 | 787 | 758 | 746 | 748 | 764 | - Change in Net Working Cap | (2,935) | (2,803) | (5,712) | (3,627) | (1,935) | (2,197) | (2,474) | -Capital Expenditures | (7,000) | (777) | (862) | (957) | (1,063) | (1,179) | (1,309) | +Income Tax Credit | 0 | 650 | 0 | 0 | 0 | 0 | 0 | -Change in Other LT Assets | (100) | (335) | (621) | (334) | (178) | (203) | (228) | Annual Free Cash Flow | (10,035) | (2,621) | (4,256) | (458) | 1,803 | 1,998 | 2,246 |
In the second step we consider the numerous techniques available for calculating the terminal value of the
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% inflation rate throughout most of the data. While this may seem like a high inflation level in today’s environment, given the time of the case and the most recent economic data, namely the 18.2% annualized increase in consumer prices reported in Exhibit 8, this seems to be much more reflective of the environment than the alternative that was available to us, Exhibit 6, which assumes a 0% inflation rate.
Step One: Determine Free Cash Flow for the Foreseeable Future Free Cash Flow Analysis | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | Earnings Before Interest, After Tax | 0 | (189) | 2,152 | 3,702 | 4,233 | 4,829 | 5,493 | + Depreciation | 0 | 833 | 787 | 758 | 746 | 748 | 764 | - Change in Net Working Cap | (2,935) | (2,803) | (5,712) | (3,627) | (1,935) | (2,197) | (2,474) | -Capital Expenditures | (7,000) | (777) | (862) | (957) | (1,063) | (1,179) | (1,309) | +Income Tax Credit | 0 | 650 | 0 | 0 | 0 | 0 | 0 | -Change in Other LT Assets | (100) | (335) | (621) | (334) | (178) | (203) | (228) | Annual Free Cash Flow | (10,035) | (2,621) | (4,256) | (458) | 1,803 | 1,998 | 2,246 |
In the second step we consider the numerous techniques available for calculating the terminal value of the