New Project Analysis of the Cost of Capital

Published: 2021-09-11 03:40:08
essay essay

Category: Business

Type of paper: Essay

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Table of Contents

1.0 Executive Summary
2.0 Financial Analysis of Ratios
3.0 Benchmark Comparisons
4.0 Estimates of Capital Structure
5.0 (WACC) Weighted Average Cost of Capital
6.0 Estimation of Cash Flow
7.0 Capital Budgeting and Sensitivity Analysis
8.0 Summary
9.0 Appendix
References











1.0 Executive Summary
From the 2011 Annual Report, Seaboard Corporation, Inc (SEB) it reveals that they specialize in the agriculture and transportation businesses in both domestic and international markets. SEB is mainly involved in the production and processing of pork, grain commodity trading, grain and sugar production, ocean transportation and the generation of power in some markets (http://finance.yahoo.com/q/sec?s=SEB+SEC+Filings).
The following detailed report was prepared to assess the overall financial strength of SEB using key financial ratios. In addition, a capital budgeting analysis of a proposed new 8 year, $ 392 million project took place to determine if the company should implement this new project.
The new project requires an initial investment of $ 320 million for the construction of buildings, the purchasing of equipment including their shipping and installation costs. It also requires funds for the net operating working capital of $ 72 million, which equals the stated project requirement of 12% of the estimated first year revenues.
Furthermore, this report will show that by using cash flow estimations the initial outlay of funds will recoup themselves within 1.29 years for the discounted payback method. It has a net present value (NPV) of almost $804 million. Therefore, to continue to add wealth for the shareholders, the implementation of the project should begin as soon as reasonably possible.





2.0 Financial Analysis of Ratios
In analyzing financial ratios, the process allows us to see the relationship of industry measures of financial performance with other businesses that compete in the same market. The two main competitors used for comparisons are Bunge Limited and Tyson Foods both of which publicly trade in the U.S. stock market.
The first measure of financial performance used are the liquidity ratios, which determine any company's ability to pay off its current debt utilizing its current assets on hand. The two charts listed below for SEB with the inclusion of Bunge and Tyson Foods show the current and quick ratios for the years of 2007-2011 for all three companies.


In reviewing the above charts, it is very clear that SEB has exceptionally elevated liquidity ratios compared to its competitors for all 5 years, which suggests that should a downturn in their core business happen, they will be more able to pay their current debt than their competitors will. Simply put, SEB enjoys an especially liquid financial position.

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