Case of Ocean Carriers

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Ocean Carriers

HW#7 PRINCIPLES OF MORDERN FINANCE (FALL 2012)

JINGYE HAN
“Ocean Carriers” case

1) Do you expect daily spot hire rates to increase or decrease next year? I expect daily spot hire rates to decrease next year.
Based on Exhibit 3, order book in 2002 for dry bulk capsizes decreased, indicating a decrease in demand. Meanwhile, Based on Exhibit 2, the majority of capsize fleets in December 2000 are in the age within 15 years, among them, the largest portion is of those under 5 years. They will work well and become mire mature till 2002, indicating no significantly increase will take place in 2002. In addition, scrappings and sinkings are very few for the recent years, also indicating not much increase in supply. With demand decrease whereas supply stays moderate, I expect the daily hire rates to decrease next year.

2) What factors drive daily hire rates?
As the daily spot hire rate is determined by supply and demand. All factors affect supply and demand for capsize fleet count. Factors affecting the supply are the number of ships available, which equals the number of vessels in service the previous year plus any new ships delivered minus any scrappings and sinkings. Components in this equation all matter. Factors affecting demand can be the frequency of scrapping in recent years, which is determined by average age of current capsize and efficiency of them. When the supply increase whereas the demand remains constant the rates will decrease, and the outcome reverses under opposite situation.

3) How would you characterize the long-term prospects of the capesize dry bulk industry? It is optimistic.
To begin with, based on the conclusion of the consulting firm, worldwide iron ore vessel shipments was for 2% annual growth since next year and then drop to 1.5% thereafter. It means the whole industry will gain an increasing popularity year by year due to more demand for ore and coal under stronger world economy. Meanwhile, with Australian production in iron ore remaining strong and India’s flourishing production, a more demand for capsize will be raised as trading with the two countries mostly rely on shipments due to their geography. Thus, the long-term prospects of the capsize dry bulk industry is quite optimistic in the long run. 1)

4) First, assume that Ocean Carriers is a US firm subject to 35% taxation. Second, assume that Ocean Carriers is located in Hong Kong, where owners of Hong Kong ships are not required to pay any tax on profits made overseas and are also exempted from paying any tax on profit made on cargo uplifted from Hong Kong. ASSUMPTION 1| tax rate= 35% discount rate=9% inflation=3% all money are in thousands ($)|  |  |  |  |  |  |  |  |  | Age of ship|  |  |  | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | Event Year| 0 | 1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | 10 | 11 | 12 | 13 | 14 | 15 | 16 | 17 | Calender Year| 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | 2008 | 2009 | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | 2016 | 2017 | Investments:| | | | | | | | | | | | | | | | | | | (1)Purchasing of capesize| | (3900)| (3900)| (31200)| | | | | | | | | | | | | | | (2)Salvage | | | | | | | | | | | | | | | | | | 5000 | (3)Accumulated Depreciation| | | | 1560 | 3120 | 4680 | 6240 | 7800 | 9360 | 10920 | 12480 | 14040 | 15600 | 17160 | 18720 | 20280 | 21840 | 23400 | (4)Adjusted basis of

machine after depreciation
(end of the year)| | | | 37440 | 35880 | 34320 | 32760 | 31200 | 29640 | 28080 | 26520 | 24960 | 23400 | 21840 | 20280 | 18720 | 17160 | 15600 | (5)Net working capital| | 500 | 515 | 530 | 546 | 563 | 580 | 597 | 615 | 633 | 652 | 672 | 692 | 713 | 734 | 756 | 779 | 0 | (6)Change in net

working...
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