Tortuga Case Study Analysis Help With Solution
Tortuga is an Islamorada, Florida based company specializing in manufacturing high-end fishing rods and reels. Tortuga was founded by a retired university professor who fished all of his life and wanted to create the best equipment possible to handle a variety of fishing conditions and fish species. He partnered with an engineer who ran a machine shop to produce some prototype reels and supplied these to commercial fishing captains as test market research. The equipment produced by Tortuga was a significant improvement over the current line available and orders were strong. Through the years, the company made some modest improvements to their original prototype and had become an industry leader.
Tortuga’s products are used by tournament fishing teams around the world. Over the past decade, tournament fishing has grown to become a big business with corporate endorsements and prize money. This growth has made what was once a recreational vocation into a full-time profession for some anglers.
The company recently launched an extensive research and development effort focused on a new flyrod and reel designed for one particular species of fish, the Atlantic Tarpon (Megalops atlanticus). Tarpon are long-lived fishes that migrate in the warmer climes of the Caribbean Sea, Gulf of Mexico, and along the Atlantic Ocean coastlines. Although the fish can reach lengths of eight feet (~2.4 meters) and weights of 280 pounds (127 kilograms), they inhabit the shallow flats and exhibit acrobatic leaps when hooked. These traits make tarpon a popular game fish for anglers. Fishing gear needs to be sturdy to handle the power of these fish and Tortuga had developed products for this niche market which were allowing anglers to be successful in their angling pursuits.
Recently, several sponsors had come together to launch competitive angling events called tournaments, where the best anglers vie to catch, and then release, the most and largest tarpon. Winners may receive up to $50,000 in a single weekend tournament and the difference between winning and losing could be a few pounds. With so much money at stake, tournament teams purchase the best gear available and are always looking for any competitive advantage with their equipment. Tortuga is looking to capitalize on this trend by offering a new line called the Tortuga Tarpon Classic. This new line incorporates the latest material and design improvements and is predicted to be the “gold standard” for all serious tournaments anglers. Tortuga plans to offer the Tortuga Tarpon Classic to recreational anglers as well to capture the growing demand by affluent anglers who want the same high-quality gear as the professionals.
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Tortuga began with a modest amount of capital that the founder had managed to save during his years in academia. As the firm grew, its financing needs expanded as well. Through the years Tortuga had developed and maintained a strong relationship with a large bank which provided short-term working capital funds in the form of a revolving line of credit. When a funding need arose, Tortuga would draw from this line of credit and then repay the short-term draw as cash flowed back to Tortuga. The $200 million revolving line of credit currently has $25 million drawn at an interest rate of 3-month Libor plus 350 basis points2. The remaining $175 million credit line can be assumed to have no fees associated with it3. Brooks looks up the most recent 3- month U.S. dollar Libor rate and sees that it is 1.50%.
Long-term financing was also in place in two forms. After several years of revenue and earnings growth, Tortuga issued five million shares of common stock at an issue price of $10 per share. The firm used this $50 million in funding to increase production lines and build a global presence by opening an additional manufacturing facility in Panama. Brooks finds the current price per share for Tortuga to be $16. Two years ago, Tortuga issued a 10-year bond for $50 million face value. Each $1,000 par bond carries a coupon of 8.5%. The bond pays interest semi-annually and is currently trading in the market at 102.50 as a percent of par. The company has a 34% corporate tax rate.
The firm calculates its required return on equity with the Capital Asset Pricing Model (CAPM) using a 4.0% historical Treasury rate for the risk-free rate and 6.0% as the expected rate of return on the market as a whole.
CAPM = Risk-free rate + beta (market risk premium)
The annual stock returns versus the market are shown in Figure 1 below for the past 10 years. Beta is calculated by regressing Tortuga stock returns on the Standard & Poor’s (S&P) 500 returns. There are a variety of methods for calculating beta. Brooks could find beta by regressing five years of weekly Tortuga returns of the S&P 500. He could use five years of monthly returns or two years of weekly returns. Each of these is a valid sample period. One well-known data source provides an “adjusted” beta which is determined by first calculating a “raw” beta by regressing two years of weekly security returns on the market. This is then adjusted by taking 2/3 of the raw beta plus 1/3 of one. This adjusts the beta to be closer to one, since beta is not stationary and should naturally move towards one through time as a firm expands. Brooks only has 10 years of annual data available at the time and decides to conduct the analysis with this information to get a quick response. He will check his result with more data points before submitting his final report to the CFO.
1. Using the Capital Asset Pricing Model, what is the required rate of return on equity, E (cost of equity) for Tortuga?
2. what are the weights of equity and debt in the
capital structure? (Rd & Re)
3. Using the information provided, what is the firm’s weighted average cost of capital (WACC)?
4. What are the net present value (NPV), internal rate of return (IRR), and Payback Periods for Projects A & B?
5. What decision rules will you use to help Tortuga reach a decision?
6. What are the strengths and weaknesses of each of the evaluation tools?
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