Galveston Fishing Company

2385 Words10 Pages
FNCE 726 : Advanced Corporate Finance Catherine Cheng, Yulin Wang, Liming Yao, Bin Zhao GALVESTON FISHING COMPANY Case Analysis Business Expansion Galveston Fishing Company, one of the largest producers of frozen shrimp in US, is planning to enter shrimp processing business in addition to its existing shrimp fishing and distribution business. Existing Business Fishing Distribution Whole seller Sales outlets New Business (purchased shrimp) Processing Sales outlets Expanding into the shrimp processing business is a feasible business strategy. The new shrimp processing business can create synergies with the parent company in two ways: first, it can utilize some existing equipment; second, the demand exceeds supply for the new shrimp company and less intercompany sales are contemplated, alleviating the negative impact on total cash flow to the company as a whole entity. To our attention, the new business will purchase the shrimp from the open market and its COGS will be subject to the fluctuation of the raw shrimp price. The lower the market price for raw shrimp, the lower COGS for the new business. However, the parent company would benefit from the higher raw shrimp price because it also operates the fishing business and make profit from selling the raw shrimps. So in our valuation of the new business, we prefer use a high risk beta. The cost of capital of the shrimp processing business Companies in the same business face similar operating risks, so they should have similar operating betas. We would use the industry betas to calculate the cost capital of Galveston’s new shrimp processing plants. In current shrimp processing industry, there are only two publicly traded firms, Treasure Isle and Ocean Foods. First, we calculate the unlevered beta of individual firms. Second, we investigate the operating details of those two comparable firms. We compare the

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