Frozen Foods Case Solution
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.
Table1: DCF Valuation
DCF Valuation  
Projected  
1  2  3  4  5  
Revenues  4400  4900  5400  5900  6400 
EBITDA  2000  2200  2400  2600  2800 
Depreciation  900  945  983  1016  1043 
EBIT  1100  1255  1417  1584  1757 
EBIT(1Tax)  770  878.5  991.9  1108.8  1229.9 
Add: Depreciation  900  945  983  1016  1043 
Less: Capex  1200  1200  1200  1200  1200 
Less: Change in Working Capital  200  250  250  250  250 
Net Cash Flows  270  374  525  675  823 
Discount Rate (WACC)  10%  
Discounted Cash Flows  245  308  394  460  509 
PV of Cash Flows  1916.199  
PV of Perpetuity  17038.97  
Total PV of Project  18955.17  
Growth  5% 
Table2: NPV at Various Investment Levels
NPV at Various Investment Levels  
Investment Levels  17455.17  15955.17  14455.17  18955.17  20455.17  21955.17  23455.17 
PV of Project  18955.17  18955.17  18955.17  18955.17  18955.17  18955.17  18955.17 
NPV  1500  3000  4500  0  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.
Table3: Beta Estimation
Estimation for Frozen Food's Equity Beta  
Company  Equity  Debt  Equity Beta  D/E Ratio 
Advanta India Ltd.  3744.2  5738.3  0.5472  1.533 
Britannia Industries Ltd.  5200.4  281.5  0.2638  0.054 
Glaxo Smith  11441.8  0  0.0959  0.000 
Jubiliant Food  2995.5  0  0.9856  0.000 
Kwality Dairy  910.5  4248  0.6357  4.666 
Rei Agro Ltd.  23611.8  38540.5  0.5393  1.632 
Venky's India  3157.9  985.7  0.669  0.312 
Zydus Wellness  1868.6  0  0.5372  0.000 
Frozen Foods  6000  2000  ?  0.333 
Unlevered Beta:  
Equity Beta/ (1+(1t)*d/e)  0.549037  
Levered Beta:  
Beta levered=unlevered beta* (1+(1t)*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.
Table4: Determination of WACC
Determination of WACC  
Total Assets  8000 
Total Debt  2000 
Debt Ratio  25% 
Equity Ratio  75% 
Tax Rate  30% 
Cost of Debt  8% 
After Tax Cost of Debt  6% 
Cost of Equity w1  11.6% 
WACC  10% 
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
Appendix1: SWOT Analysis
STRENGTHS  WEAKNESSES  OPPORTUNITIES  THREATS 
· 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

Appendix2: Porter’s Five Forces Model
Bargaining Power Of Buyer  Bargaining Power Of Suppliers  Threat Of New Entrants  Threat Of Substitutes  Rivalry Amongst Existing Competitors 
High  Low  Low  High  High 
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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