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Seafood Case - Capm and Wacc

Essay by   •  May 3, 2011  •  Essay  •  423 Words (2 Pages)  •  3,026 Views

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In order to find the hurdle rate of the company we focused on finding the CAPM and WACC. One

should not use the inflated income statement because it has already been accounted for. Our original

inputs for the CAPM were 9.3% risk free rate, 16% market risk and a 1.25 beta. This totaled a 18% return

on equity. Applying the 30% debt to a 48% tax rate we found the WACC to be 15.11%. We also took that

discount rate and applied it to FCF's to get a NPV. We found the IRR of the project to be 4%

Generally the 15.11% should be the hurdle rate. This would be the rate needed in order to turn

a profit. In this case we found that is not entirely correct. Since this project is unique to Harris Seafood

one would assume a higher WACC or hurdle rate would be necessary. The processing industry is

somewhat different than the fishing industry forcing Harris Seafood to acquire new risks. The new risks

should directly impact the WACC or hurdle rate.

In conclusion the hurdle rate can be somewhat subjective. In order for the project to be

desirable it needs to generate profit to the company. Since there are many external factors of risk that

could affect the hurdle rate, it is hard to grasp a concrete number.

In order to find the hurdle rate of the company we focused on finding the CAPM and WACC. One

should not use the inflated income statement because it has already been accounted for. Our original

inputs for the CAPM were 9.3% risk free rate, 16% market risk and a 1.25 beta. This totaled a 18% return

on equity. Applying the 30% debt to a 48% tax rate we found the WACC to be 15.11%. We also took that

discount rate and applied it to FCF's to get a NPV. We found the IRR of the project to be 4%

Generally the 15.11% should be the hurdle rate. This would be the rate needed in order to turn

a profit. In this case we found that is not entirely correct. Since this project is unique to Harris Seafood

one would assume a higher WACC or hurdle rate would be necessary. The processing industry is

somewhat different than the fishing industry forcing Harris Seafood to acquire new risks. The new risks

should directly impact the WACC or hurdle rate.

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