GALVESTON FISHING COMPANY1

From a modest beginning, Galveston Fishing Company had evolved into one of the largest producers of frozen shrimp in the United States by 2000. It is a privately held company. The company has a fleet of over 100 boats, which plies the waters between Texas and Mexico. Each boat has a built-in freezer. Every night, as soon as the shrimp are taken out of the nets, they are deheaded and flash frozen. On a typical trip, a boat stays out 45 to 60 days before returning to port.

Galveston Fishing Companys in-shore facilities included a dock and packing plant where the shrimp are unloaded, graded by size and quality, and put into 5 lb. containers. In turn the 5lb. containers are placed in 50 lb. cartons for shipment to a local cold storage plant from which the firm leased space.

The shrimp are distributed through a captive sales organization. Roughly 40% of sales are made to wholesalers along the East Coast of the United States. The wholesalers sell the shrimp to retail establishments and institutional outlets. Another 35% of sales are made to Japanese trading companies. The remaining sales are made to processors. Processors converted the raw shrimp into an intermediate product such as pre-cooked or breaded shrimp. In turn, the processors sold their products to the same mix of outlets as that described above (i.e. retail and institutional establishments).

Galveston Fishing Company is considering several investment projects including expansion in existing business, entering the lobster business which requires somewhat differently outfitted boats and entering into new shrimp processing business where it can use its existing equipment.

There are no dominant competitors in the shrimp processing industry. There are about six processors with sales greater than $30 million. It is somewhat difficult to get accurate data on sales and profitability of these companies because most are also privately owned. However, there are two publicly traded companies, Treasure Isle, Inc. and Ocean Foods, Inc. Selected information for these companies is shown in Exhibit I.

Galveston Fishing Companys finance staff has determined that it would cost about $7 million to build an efficient size processing plant. If construction were to begin in the first quarter of 2004, the plant could be finished by the end of the year the operation will start at the beginning of 2005. The plant would be located on land which is owned by the City of Brownsville, Texas, and which would be leased to Galveston Fishing Company for 99 years at a nominal cost.

1N.B. Gultekin

Galveston Fishing Company, page 1

The raw shrimp to be processed at the plant were to be purchased on the open market. There was a possibility that some product of the new business would be sold to other plants of the parent, but given the fact that demand exceeded supply for the new shrimp company, few intercompany sales were contemplated.

A 6-year pro-forma data for the processing plant are shown in Exhibit II.

In answering the questions given below make the following assumptions for Galveston Fishing Company:

Risk free rate 7%

Market risk premium 8%

Tax rate 35%

Target debt/value ratio 30%

Cost of (unsecured) debt at target debt/value ratio 8%

Remember that this is a project of a profitable parent company so even if you get a negative earnings (a loss) you still subtract the quantity of (tax rate x earnings before taxes)

Sales Net Income Total current assets Total assets Total current liabilities Long-term debt Net worth

$

$

$ $

71,457 1,264 10,292 22,130 7,023 3,577 11,530

10.875 507 2.49 0.40 4.37 1.60 0

35%

EXHIBIT I Information on Comparable Companies

Closing share price Shares (000) Earnings per share Dividends per share Price to earnings ratio Beta (equity) Beta(debt) 0

Tax rate

35%

Galveston Fishing Company Page 4

Ocean Foods, Inc.

$ 27,451 1,307 6,020 10,276 3,771 1,400 5,105

Treasure Isle, Inc.

$

$ $

11.25 887 1.47 0.46 7.65 0.85

EXHIBIT II Processing Plant Proposal Projections

PROJECTED INCOME STATEMENT
	2004	2005	2006	2007	2008	2009
Pounds	-	5,500	12,000	14,250	14,500	14,750
Price per pound ($)	$ 4.75	$ 5.27	$ 5.85	$ 6.50	$ 7.21	$ 8.00
Revenues (thousands)		$ 28,999	$ 70,230	$ 92,572	$ 104,557	$ 118,059
COGS		25,339	57,588	75,908	85,738	96,808
Gross profit		3,660	12,642	16,663	18,820	21,251
SG&A		3,190	7,725	8,794	9,933	11,216
Depreciation		833	787	758	746	748
Pretax operating profit		$ (363)	$ 4,130	$ 7,111	$ 8,141	$ 9,287
PROJECTED BALANCE SHEET
	2004	2005	2006	2007	2008	2009
Assets
Cash	$ 450	$ 290	$ 702	$ 926	$ 1,046	$ 1,181
Accounts receivable	-	2,415	5,850	7,719	8,709	9,834
Inventories	2,485	5,063	9,790	12,919	14,575	16,458
Other current assets	-	581	1,404	1,853	2,092	2,361
Total Current assets	$ 2,935	$ 8,349	$ 17,746	$ 23,418	$ 26,422	$ 29,834
Net plant and equipment	7,000	6,944	7,019	7,218	7,535	7,966
Other long-term assets	100	435	1,056	1,390	1,568	1,771
Total assets	$ 10,035	$ 15,728	$ 25,821	$ 32,026	$ 35,525	$ 39,571
Liabilities
Accounts payable	-	2,083	4,733	6,246	7,047	7,957
Net asset value	$ 10,035	$ 13,645	$ 21,088	$ 25,780	$ 28,478	$ 31,614
Questions: 1. Determine NWC for each year. 2. Determine CAPEX including Other Long-term Assets for each year 3. Determine change in NWC and Change in capex for each year. 4. What is the FCF for each year? 5. What is the value of the ongoing business from year 2010 onwards(Terminal Value) assuming that the free cash flows willgrowat anestimated annual rate of 2% 6. What is the NPV of this project? 7. What is the IRR of this project? 8. Using the DuPont Identity tree fill in the tree and derive all thedrivers for year 2008, 2009. See example from book below (All answers need detailed explanations, show all work)