Frozen Foods Harvard Case Solution & Analysis

Frozen Foods Case Study Solution

DCF Valuation Analysis

A DCF valuation is conducted using the projected balance sheet and income statement for the company’s expansion to evaluate the Net Present Value of the new project on at various investment levels. On the basis of projected cash flows for new investment, the present value of firm is 1916.19 thousands rupees. As there is potential growth in next five years company will earn high profit. Different amounts have taken to calculate NPV of the new project. If the firm will invest 17455.17 so the NPV will be 1500 and if the firm will invest 23455.17 NPV will be negative which is -4500 and if the firm invest 18955.17 NPV will be 0. Firm will get highest NPV when company will invest 14455.75 thousand rupees for expansion of the business because inflows are higher. Table 1 and 2 shows the DCF Valuation and the NPV at various investment levels for Frozen Foods.

Table-1: DCF Valuation

DCF Valuation
Projected
12345
Revenues44004900540059006400
EBITDA20002200240026002800
Depreciation90094598310161043
EBIT11001255141715841757
EBIT(1-Tax)770878.5991.91108.81229.9
Add: Depreciation90094598310161043
Less: Capex12001200120012001200
Less: Change in Working Capital200250250250250
Net Cash Flows270374525675823
Discount Rate (WACC)10%
Discounted Cash Flows245308394460509
PV of Cash Flows1916.199
PV of Perpetuity17038.97
Total PV of Project18955.17    
Growth5%

Table-2: NPV at Various Investment Levels

NPV at Various Investment Levels
Investment Levels17455.1715955.1714455.1718955.1720455.1721955.1723455.17
PV of Project18955.1718955.1718955.1718955.1718955.1718955.1718955.17
NPV1500300045000-1500-3000-4500

From the above Tables, it could be seen that the project could be feasible for the Frozen Foods if it assumes a maximum investment level of $18955.17 where the NPV of the project tends to be zero.

Beta Estimation:

The Frozen Food Products going to establish a new plant because of the increased demand of their product in India. At this time, the Frozen Food Products was not listed in stock exchange. The company faced a difficulty in identifying the risk and returns associated with the product. For this, the company takes the others companies’ information which are similar by nature and by its capital structure. The company gathered the information of the related companies’ that are their equity, debt and equity beta to calculate the debt to equity ratio. The debt to equity ratio is metric used for financial analysis. It indicates the ratio of the debt and equity that how much of company’s operations are run by their debts verses their equity. The following table illustrate the equity, debt, beta along with their debt ratios. And also represent the beta calculated for the frozen company on the basis of other companies’ information.

Table-3: Beta Estimation

Estimation for Frozen Food's  Equity Beta
CompanyEquityDebtEquity Beta D/E Ratio
Advanta India Ltd.3744.25738.30.54721.533
Britannia Industries Ltd.5200.4281.50.26380.054
Glaxo Smith11441.800.09590.000
Jubiliant Food2995.500.98560.000
Kwality Dairy910.542480.63574.666
Rei Agro Ltd.23611.838540.50.53931.632
Venky's India3157.9985.70.6690.312
Zydus Wellness1868.600.53720.000
Frozen Foods60002000?0.333
Unlevered Beta:
Equity Beta/ (1+(1-t)*d/e)0.549037
Levered Beta:
Beta levered=unlevered beta* (1+(1-t)*d/e)0.445165

Table 3 indicates the other companies’ debt, equity, equity beta and the calculated debt to equity ratio. All the information was gathered to calculate the company’s beta to calculate the risk associated with the new project.  Firstly, the un leveraged beta is calculated then eventually with the help of un leveraged beta, leveraged beta is calculated. The beta representing the amount of 0.4451, this indicate that project has some range of risk associated because the project will be considered safe when the beta ranges from 1 to 1.5.

WACC Calculations:

The WACC is stands for the weighted average cost of capital. It is calculated to analyze the return the company will receive from the new project. The WACC also tells the risk associated with the project. WACC provides the investor with the profitability associated with the project.

Table-4: Determination of WACC

Determination of WACC
Total Assets8000
Total Debt2000
Debt Ratio25%
Equity Ratio75%
Tax Rate30%
Cost of Debt8%
After Tax Cost of Debt6%
Cost of Equity w-111.6%
WACC10%

The above table shows the WACC calculations. Firstly, beta was calculated. Then with some more information, the cost of equity along with the risk premium was calculated. After that eventually WACC rate is calculated which is valued at 10%. This indicate that the company will require to pay 10% to its investors for their financing.

Recommendations

On the basis of above analysis, Maria is recommended to consider the project if the project investment is not more than $18955 at which the company could expand into new markets without any loss of funds and an NPV of 0. The company is recommended to expand its product line as the expansion could increase the consumer base of the company and could bring potential amount of revenues for the company in future. Moreover, the expansion could decrease the dependency of the firm on its local markets to avoid the negative impacts of any external factor that could occur in the market.

Conclusion

In conclusion, it could be said that the expansion in the new markets within India could bring potential amount of revenues for the firm along with the achievement of large number of consumers and a strong consumer base. Moreover, a the project has a positive NPV at the investment level less than $18955, it could led to an increase in the overall firm’s value and could enable the firm to be a strong player in the market with efficient financial metrics.

Appendices

Appendix-1: SWOT Analysis

STRENGTHSWEAKNESSESOPPORTUNITIESTHREATS
·         Large domestic market

·         Raw material availability

·         Retained earnings

·         Strong competition

·         High R&D cost

 

·         Forward integration

·         Market development

·         Organic Food

 

·         Worldwide competition

·         Threat of substitute

·         Technological advancement

 

 

Appendix-2: Porter’s Five Forces Model

Bargaining Power Of BuyerBargaining Power Of SuppliersThreat Of New EntrantsThreat Of SubstitutesRivalry Amongst Existing Competitors
HighLowLowHighHigh
Mass market

Large availability of substitute products

Low switching cost

 

Numerous suppliers available

Bulk purchases

 

 

High growth potential

Intensive capital requirement

High competition

Less switching cost

availability of substitute products

changing consumer preferences

 

 

High number of peers in the market

Technological advancement

Governmental policies

 

 

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