2. Estimate the required rate of return on assets (required rate of return of unlevered equity)
for the shrimp processing business.
3. Estimate the required rate of return on equity for the proposed shrimp processing
business (at the target debt/value ratio).
4. Estimate the weighted average cost of capital for the proposed shrimp processing
business (at the target debt/value ratio).
5. Calculate the projected unlevered free cash flows for the processing plant for years 2005-
2009 using the information provided in Exhibit II.
6. Calculate the following terminal values for the project at the end of year 2009 assuming
that the unlevered cash flows will grow at an estimated annual rate of 2% from that
point on:
• Unlevered terminal value
• Levered terminal value assuming that the firm will maintain the target debt/value
ratio after 2009 & • Discounted value of interest tax shields after the year 2009.
7. Estimate the NPVU from the operations of the shrimp processing business.
(NPVU is the NPV of the project if financed by all equity capital)
8. Estimate the NPVL for the shrimp processing business at the target debt/value ratio.
(NPVL is NPV of the project if financed by a mix of debt and equity)
9. Should Galveston Fishing Company enter the shrimp processing business based on your
answers to 7&8?
Yes. Because NPV is greater than zero.
10. Galveston Fishing Company contemplates about borrowing $10 for the project and
structure the new division as a stand alone entity. The loan will be secured by the assets
and future cash flows of the project, not by the parent company. The loan has a maturity
of 5 years and carries interest rate of 11%. The principle is payable at end of 2009.
Estimate the NPVL of the project for Galveston with this new financing possibility. (In
your answer, also assume that the firm will maintain a 30% debt/value ratio after the year
2009.)
11. There was also an offer to finance this project by the municipality of Brownsville, Texas.
The municipality offered Galveston Fishing Company a $10 million loan for 5 years to
build the shrimp processing plant in Brownsville. The financial terms of the loan
stipulated that only interest payments would be paid at 5% during 2005-2009 and the
entire amount of the principal of $10 million was due at the end of 2009 as a single
payment). The investment bankers of Galveston Fishing Company finance group
estimated that the market interest rate of a comparable debt instrument, if placed
privately and secured by the project, would have been 11%.
Estimate the NPVL of the project for Galveston with this new financing possibility. (In
your answer, again assume that the firm will maintain a 30% debt/value ratio after the
year 2009.)
