Inflation 0%

Tax Rate 48%

Current Liabilities 9%
FCR projection with 0% inflation
Free Cash Flow ($000) 1980 1981 1982 1983 1984
Revenues $ - $ 26,125 $ 57,119 $ 67,759 $ 68,875
Cost Of Goods Sold $ - $ 22,828 $ 46,837 $ 55,562 $ 56,478
Selling, General and Admin $ - $ 2,874 $ 6,283 $ 6,437 $ 6,543
Depreciation $ - $ 833 $ 788 $ 731 $ 693
Pre-Tax Op Profit $ - $ (410) $ 3,211 $ 5,029 $ 5,161
Taxes (48%) $ - $ - $ 1,541 $ 2,414 $ 2,477
Net Income $ - $ (410) $ 1,670 $ 2,615 $ 2,684

Total Current Assets $ 2,935 $ 7,521 $ 14,434 $ 17,123 $ 17,405

Total Current Liabilities $ - $ 2,351 $ 5,141 $ 6,098 $ 6,199
Net Working Capital $ 2,935 $ 5,170 $ 9,293 $ 11,025 $ 11,206
Change in Net Working Capital $ 2,935 $ 2,235 $ 4,124 $ 1,731 $ 182

Free Cash Flows $ (2,935) $ (1,812) $ (1,666) $ 1,615 $ 3,195

Discount Factor 1.000 1.136 1.289 1.464 1.663
PV $ (2,935) $ (1,595) $ (1,292) $ 1,103 $ 1,922

PV of FCFs $ 429
Terminal or Continuing Value $ 12,101 (Liquidation method)
Initial Outlay $ 7,000
NPV $ 5,530
*We assume the plant does not
receive the additional tax credit of
$650,000 in 1981

_x000D_#000000 IN CONFIDENCE
 Inflation 11%
Tax Rate 48%
Current Liabilities 9%
flation
1985 1986 Free Cash Flow ($000) 1980
$ 70,063 $ 71,250 Revenues $ -
$ 57,451 $ 58,425 Cost Of Goods Sold $ -
$ 6,656 $ 6,769 Selling, General and Admin $ -
$ 661 $ 634 Depreciation $ -
$ 5,295 $ 5,422 Pre-Tax Op Profit $ -
$ 2,542 $ 2,603 Taxes (48%) $ -
$ 2,753 $ 2,819 Net Income $ -
$ -
$ 17,705 $ 18,005 Total Current Assets $ 2,935
$ 6,306 $ 6,413 Total Current Liabilities $ -
$ 11,399 $ 11,593 Net Working Capital $ 2,935
$ 193 $ 193 Change in Net Working Capital $ 2,935

$ 3,221 $ 3,260 Free Cash Flows $ (2,935)

1.888 2.144 Discount Factor 1.0000
$ 1,706 $ 1,521 PV $ (2,935)

PV of FCFs $ (2,479)
Terminal or Continuing Value $ 13,402
Initial Outlay $ 7,000
NPV $ 3,923

_x000D_#000000 IN CONFIDENCE
 FCR projection with 11% inflation
1981 1982 1983 1984 1985
$ 28,999 $ 70,376 $ 92,669 $ 104,557 $ 118,059
$ 25,339 $ 57,708 $ 75,989 $ 85,737 $ 96,809
$ 3,190 $ 7,741 $ 8,804 $ 9,933 $ 11,216
$ 833 $ 787 $ 758 $ 746 $ 748
$ (363) $ 4,139 $ 7,119 $ 8,141 $ 9,287
$ - $ 1,987 $ 3,417 $ 3,908 $ 4,458
$ (363) $ 2,152 $ 3,702 $ 4,233 $ 4,829
$ - $ - $ - $ - $ -
$ 8,348 $ 17,784 $ 23,417 $ 26,422 $ 29,834
$ 2,610 $ 6,334 $ 8,340 $ 9,410 $ 10,625
$ 5,738 $ 11,450 $ 15,077 $ 17,012 $ 19,209
$ 2,803 $ 5,712 $ 3,627 $ 1,935 $ 2,197

$ (2,333) $ (2,773) $ 833 $ 3,044 $ 3,380

1.2200 1.4884 1.8158 2.2152 2.7025
$ (1,912) $ (1,863) $ 459 $ 1,374 $ 1,251

(Liquidation method)

_x000D_#000000 IN CONFIDENCE
 1986
$ 133,267
$ 109,279
$ 12,660
$ 764
$ 10,564
$ 5,071
$ 5,493
$ -
$ 33,677
$ 11,994
$ 21,683
$ 2,474

$ 3,783
3.2971
$ 1,147

_x000D_#000000 IN CONFIDENCE
 Scenario NPV(11% inflation) NPV(0% inflation)
Original Calculations $ 3,923 $ 4,908
13.5% Debt $ 4,013 $ 5,065
16% Bank Loan $ 3,965 $ 4,981
Increased Market Risk $ 3,550 $ 4,250
100% Debt $ 6,118 $ 6,047
100% Equity $ 3,382 $ 4,506

Scenario Analysis:Discount Rate

NPV(11% inflation) NPV(0% inflation)
7000
6000
5000
4000
3000
2000
1000
0
Original 13.5% Debt 16% Bank Increased 100% Debt 100% Equity
Calculations Loan Market Risk

_x000D_#000000 IN CONFIDENCE
% changes (11% inflation) % changes (0% inflation) NPV(0% inflation)
Liquidation Value Model (Book Value) 4908
2.28% 3.20% Constant Growth Rate Model (Original) 24506
1.07% 1.51% Annuity Liquidation Value Model 7826
-9.50% -13.40% Multiples Model 5350
55.95% 23.21%
-13.80% -8.19%

Scenario Analysis: Terminal Value

NPV(0% inflation) NPV(11% inflation)
30000 24506
20000
10000 4908 7826 5350
0

_x000D_#000000 IN CONFIDENCE
 NPV(11% inflation) % changes (11% inflation) % changes (0% inflation)
3923
14432 399.35% 267.88%
4101 59.47% 4.54%
2749 9.01% -29.92%

al Value
tion)

6 5350

_x000D_#000000 IN CONFIDENCE
 WACC Weight of Debt
Original Calculations (from FCF using
liquidation value) 0.3
13.5% Debt (conventional Long-term debt)

0.3
16% Bank Loan

0.3
Increased Market Risk (extra risk premium of
5%)

0.3
100% Debt

1
100% Equity

Terminal Value Calculations List of Proxies and Assumptions

Liquidation Value Model (Book Value)
Book Value of Assets found from
Exhibits 6&7 (not true salvage
value nor does it reverse the
effect of Double-Declining
Depreciation

Constant Growth Rate Model (Original) Growth estimate=Geometric

Mean of US GNP from 1970-1979

_x000D_#000000 IN CONFIDENCE
Annuity Liquidation Value Model We take the average FCF for years
1983-1986 to approximate annual
FCF after 1986; FCF from years
prior to 1983 are omitted since
their negative FCF are an anomaly
associated with non-recurring
start-up costs. We also arbitrarily
assume that the plant can remain
operational until 1996 (10 years).

Multiples Model We use a multiple of 8.26 since it

is the average price-to-earnings
ratio for Treasure Isle (a
"comparable" firm), for years
1975-1979

*Each Terminal Value calculation uses the

same discount rate (the original WACC for 0%
and 11% respectively). We are using the
discount rate as a control variable to compare
terminal valuations independently.

_x000D_#000000 IN CONFIDENCE
 Cost of Equity (11%
Weight of Equity Cost of Debt Inflation)

0.7 0.095 0.273549818181818

0.7 0.135 0.273549818181818

0.7 0.16 0.273549818181818

0.7 0.095 0.3235498182

0 0.095 0.273549818181818

1 0.095 0.273549818181818

Terminal Value (0% inflation) Terminal Value (11% inflation) NPV(0% inflation)
$12,100.72 $13,401.95 $4,908

$31,233.94 $21,159.88 $24,506

_x000D_#000000 IN CONFIDENCE
 $14,554.42 $10,829.41 $7,826

$12,077.88 $9,477.41 $5,350

_x000D_#000000 IN CONFIDENCE
 Cost of Equity (0% Cost of Capital (11% Cost of Capital NPV(11% NPV(0%
Inflation) Inflation) (0% Inflation) inflation) inflation)

0.163549818181818 0.2199848727 0.1429848727 $ 3,923 $ 4,908

0.163549818181818 0.212544872727273 0.13554487273 $ 4,013 $ 5,065

0.163549818181818 0.216444872727273 0.13944487273 $ 3,965 $ 4,981

0.2135498182 0.25498487274 0.17798487274 $ 3,550 $ 4,250

0.163549818181818 0.095 0.095 $ 6,118 $ 6,047

0.163549818181818 0.273549818181818 0.16354981818 $ 3,382 $ 4,506

NPV(11% inflation) Description

$3,923

This model assumes that the processing plant can be sold to rational investor for a price that is approx
the plant beyond 1986. However, the final sale price is estimated with book value (historical cost) instea
cost), and therefore does not reflect the fundamental value of the plant. Additionally the book value of l
by arbitrary depreciation rules instead of replacement value. However, book value is a reasonable appr
of current assets since current assets are sold soon after they are bought. At the very least, this model c
"minimum" price that the plant can be sold for, and thus provides a conservative estimate. Terminal Val
will be higher for inflationary scenarios. This is expected since the book values of Exhibit 7 are already in

$14,432 This model assumes that the 1986 CF repeats every year forever (at a constant growth rate) and that dis
year. These assumptions are false and lead to a terminal value calculation that is significantly higher than
tested here.

_x000D_#000000 IN CONFIDENCE
 $4,101

This would be the best valuation model if more information was given. This is another liquidation model
the plant to estimate terminal value. However, instead of using book value, it evaluates the processing
It assumes rational investors will purchase the plant for an amount equal to the price of an annuity tha
the plant (after adjusting discount rates for risk differentials). There are two questionable assumptions m
the arbitrary assumption that the plant will remain operational for 10 years after it is sold to another inv
statistical information were available, investors could make a reasonable forecast of how many years the
before going obsolete. For example, they might find the probability of the plant surviving more/less tha
discount rates accordingly. The second assumption the model makes, is that the CFs from all remaining y
constant. However, this premise is still reasonable if either, there are few operational years left in the in
has matured/stabilized at a point where potential growth and marginal risk are low (such as a local utiliti
estimate of constant CFs will be close to the actual cash flow received.

$2,749 This is the most unrealistic of the models we tested. It assumes that investors will evaluate the processin
they will evaluate another shrimp processing business (Treasure Isle). The theory is that, since Treasure
earnings ratio of 8.26, investors are willing to buy Treasure Isle for a price that is 8.26 times the income o
investors will buy Harris' processing plant in 1986 for a price that is 8.26 times its 1986 net income. How
to multiply 8.26 times the 1986 FCF instead of the 1986 net income. Either way, multiplies are a flawed m
premised on a "incomplete enumeration" fallacy; it presupposes that any two firms of the same industry
the finite number of potential differences between those firms.

_x000D_#000000 IN CONFIDENCE
 *Sensitivity analysis for different discount rates

If Harris used conventional bonds instead of the Industrial

Revenue Bonds, the NPV for both inflation scenarios will decrease
slightly.

If Harris used bank loans instead of the Industrial Revenue Bonds,

the NPV for both inflation scenarios will decrease even further.

If equity investors perceive an increase in general market risk,

they will demand a higher required return on equity in the plant.
We assume a 5% increase in the risk premium.

If Harris financed the entire $7 million plant with only debt, Harris'
NPV will rise significantly for both inflation scenarios, because the
cost of debt is less than the cost of equity.

If Harris financed the entire $7 million plant with only equity

Harris' NPV will fall for both inflation scenarios, because the cost
of equity is greater than the cost of debt. A larger discount rate
(denominator) makes a smaller NPV calculation.

d to rational investor for a price that is approximately the PV of all FCFs from
stimated with book value (historical cost) instead of market value (actual
ue of the plant. Additionally the book value of long-term assets are reduced
lue. However, book value is a reasonable approximation of the market value
they are bought. At the very least, this model can be used to find the
provides a conservative estimate. Terminal Values calculated with this model
since the book values of Exhibit 7 are already increased to adjust for inflation.

forever (at a constant growth rate) and that discount rates are constant every
value calculation that is significantly higher than the other 3 valuation models

_x000D_#000000 IN CONFIDENCE
 on was given. This is another liquidation model that uses the final sale price of
f using book value, it evaluates the processing plant as if it were an annuity.
an amount equal to the price of an annuity that gives the same cash flows as
als). There are two questionable assumptions made by this model. The first is
tional for 10 years after it is sold to another investor. However, if more
ke a reasonable forecast of how many years the plant can continue to operate
probability of the plant surviving more/less than 10 years and adjust their
model makes, is that the CFs from all remaining years of plant operation is
er, there are few operational years left in the investment, or if this business
h and marginal risk are low (such as a local utilities company). In both cases, an
flow received.

sumes that investors will evaluate the processing plant the same way that
reasure Isle). The theory is that, since Treasure Isle has an average price-to-
re Isle for a price that is 8.26 times the income of Treasure Isle. Therefore,
ice that is 8.26 times its 1986 net income. However, in our analysis we choose
net income. Either way, multiplies are a flawed methodology, because it is
upposes that any two firms of the same industry can treated equally despite
firms.

_x000D_#000000 IN CONFIDENCE
Inflation 0%
Tax Rate 48%
Current Liabilities 9%
FCR projection with 0% inflation
Free Cash Flow ($000) 1980 1981 1982 1983 1984
Revenues $ - $ 26,125 $ 57,119 $ 67,759 $ 68,875
Cost Of Goods Sold $ - $ 22,828 $ 46,837 $ 55,562 $ 56,478
Selling, General and Admin $ - $ 2,874 $ 6,283 $ 6,437 $ 6,543
Depreciation $ - $ 833 $ 788 $ 731 $ 693
Pre-Tax Op Profit $ - $ (410) $ 3,211 $ 5,029 $ 5,161
Taxes (48%) $ - $ - $ 1,541 $ 2,414 $ 2,477
Net Income $ - $ (410) $ 1,670 $ 2,615 $ 2,684

Total Current Assets $ 2,935 $ 7,521 $ 14,434 $ 17,123 $ 17,405

Total Current Liabilities $ - $ 2,351 $ 5,141 $ 6,098 $ 6,199
Net Working Capital $ 2,935 $ 5,170 $ 9,293 $ 11,025 $ 11,206
Change in Net Working Capital $ 2,935 $ 2,235 $ 4,124 $ 1,731 $ 182

Free Cash Flows $ (2,935) $ (1,812) $ (1,666) $ 1,615 $ 3,195

Discount Factor 1.000 1.143 1.306 1.493 1.707
PV $ (2,935) $ (1,585) $ (1,275) $ 1,081 $ 1,872

PV of FCFs $ 272
Terminal or Continuing Value $ 11,636 (Liquidation method)
Initial Outlay $ 7,000
NPV $ 4,908
*We assume the plant does not
receive the additional tax credit of
$650,000 in 1981

_x000D_#000000 IN CONFIDENCE
 Inflation 11%
Tax Rate 48%
Current Liabilities 9%
flation
1985 1986 Free Cash Flow ($000) 1980
$ 70,063 $ 71,250 Revenues $ -
$ 57,451 $ 58,425 Cost Of Goods Sold $ -
$ 6,656 $ 6,769 Selling, General and Admin $ -
$ 661 $ 634 Depreciation $ -
$ 5,295 $ 5,422 Pre-Tax Op Profit $ -
$ 2,542 $ 2,603 Taxes (48%) $ -
$ 2,753 $ 2,819 Net Income $ -
$ -
$ 17,705 $ 18,005 Total Current Assets $ 2,935
$ 6,306 $ 6,413 Total Current Liabilities $ -
$ 11,399 $ 11,593 Net Working Capital $ 2,935
$ 193 $ 193 Change in Net Working Capital $ 2,935

$ 3,221 $ 3,260 Free Cash Flows $ (2,935)

1.951 2.230 Discount Factor 1.0000
$ 1,651 $ 1,462 PV $ (2,935)

PV of FCFs $ (2,479)
Terminal or Continuing Value $ 13,402
Initial Outlay $ 7,000
NPV $ 3,923

_x000D_#000000 IN CONFIDENCE
 FCR projection with 11% inflation
1981 1982 1983 1984 1985
$ 28,999 $ 70,376 $ 92,669 $ 104,557 $ 118,059
$ 25,339 $ 57,708 $ 75,989 $ 85,737 $ 96,809
$ 3,190 $ 7,741 $ 8,804 $ 9,933 $ 11,216
$ 833 $ 787 $ 758 $ 746 $ 748
$ (363) $ 4,139 $ 7,119 $ 8,141 $ 9,287
$ - $ 1,987 $ 3,417 $ 3,908 $ 4,458
$ (363) $ 2,152 $ 3,702 $ 4,233 $ 4,829
$ - $ - $ - $ - $ -
$ 8,348 $ 17,784 $ 23,417 $ 26,422 $ 29,834
$ 2,610 $ 6,334 $ 8,340 $ 9,410 $ 10,625
$ 5,738 $ 11,450 $ 15,077 $ 17,012 $ 19,209
$ 2,803 $ 5,712 $ 3,627 $ 1,935 $ 2,197

$ (2,333) $ (2,773) $ 833 $ 3,044 $ 3,380

1.2200 1.4884 1.8158 2.2152 2.7025
$ (1,912) $ (1,863) $ 459 $ 1,374 $ 1,251

(Liquidation method)

_x000D_#000000 IN CONFIDENCE
 1986
$ 133,267
$ 109,279
$ 12,660
$ 764
$ 10,564
$ 5,071
$ 5,493
$ -
$ 33,677
$ 11,994
$ 21,683
$ 2,474

$ 3,783
3.2971
$ 1,147

_x000D_#000000 IN CONFIDENCE
Year Return on Equity for US Manufacturing Return on Equity for US Manufacturing _GM
1970 9.3 1.093
1971 9.7 1.097
1972 10.6 1.106
1973 12.8 1.128
1974 14.9 1.149
1975 11.6 1.116
1976 13.9 1.139
1977 14.2 1.142
1978 15 1.15
1979 16.3 1.163
Average ROE 12.83 12.81

*Average ROE for US manufacturing firms

is used as a proxy to estimate the
expected market return. We used
Treasure Isle's Beta of 1.62 as a
benchmark.

_x000D_#000000 IN CONFIDENCE
Benchmark Parameters
Nominal Risk Free Rate 0.0714

Expected Return on Market Portfolio 0.1283

Beta 1.6200

Cost of Equity (11% Inflation) 0.2735

Cost of Equity (0% Inflation) 0.1635

*We use the approximation that Nominal Rates= Real Rates + *The True cost of debt
Inflation. However, the exact calculation should be; Nominal is variable, however
Rates= Real Rates + Inflation + (Real Rates * Inflation) we choose a rate of
9.5% since that is the
current interest rate
on Industrial Revenue
Bonds.*Harris will
always prefer to use
Industrial Revenue
Bonds over
conventional bonds,
assuming that income
tax rates never
become negative.
Industrial
Interest=conventional
interest * (1-tax rate)

_x000D_#000000 IN CONFIDENCE
WACC Average InterestAverage Interest rate on 6 month T-Bills
Weight of Debt 0.3 6.56 1.0656
Weight of Equity 0.7 4.51 1.0451
Cost of Debt 0.095 4.47 1.0447
Cost of Equity (11% Inflation) 0.2735 7.81 1.0781
Cost of Equity (0% Inflation) 0.1635 7.93 1.0793
6.12 1.0612
5.27 1.0527
Cost of Capital (11% Inflation) 0.2199848727 5.54 1.0554
Cost of Capital (0% Inflation) 0.1429848727 7.57 1.0757
Cost of Capital 0.1355448727 10.02 1.1002
12.79 1.1279
Arithmatic Avg 7.14 7.12

*We assume that the firm uses We used the

30% Debt and 70% equity, average
because 30% is the maximum interest rate on
amount of leverage that Mr. 6 month T-Bills
Harris is willing to use and ideally from 1970-
we want to use as much leverage 1979 to
as possible given that constraint. estimate the
risk free rate
(Rrisk-free).

_x000D_#000000 IN CONFIDENCE
Year GNP GNP Deflator Real GNP
1970 982 5.4 181.8519 1
1971 1063 5.1 208.4314 0.14616 1.14616
1972 1171 4.1 285.6098 0.370282 1.370282
1973 1306 5.8 225.1724 -0.211608 0.788392
1974 1412 9.7 145.567 -0.353531 0.646469
1975 1529 9.6 159.2708 0.094141 1.094141
1976 1702 5.2 327.3077 1.055038 2.055038
1977 1899 6 316.5 -0.03302 0.96698
1978 2128 7.3 291.5068 -0.078967 0.921033
1979 2369 8.8 269.2045 -0.076507 0.923493
Febuary 1980 2521 9.5 265.3684 -0.01425 0.98575
Average US GNP Growth Rate 0.089774 1.034954
Geometric Mean Growth of US GNP 0.034954

_x000D_#000000 IN CONFIDENCE