Dixon, an American specialty chemical producer, wants to buy Collinsville plant fromAmerican Chemical Corporation, another typical chemical company in 1979. Dixon wants todiversify its product line by acquiring the aforesaid plant, which produces sodiumchlorate tosupply to paper producers in South-eastern part of the US. This plant initially cost USD 12million and additional USD 2.25 million needed to buy laminate technology to increaseefficiency and profitability of the plant in order.
About The Collinsville Plant
American Chemical Corporation’s plant in Collinsville had the capacity to produce 40000
tons of sodium chlorate per year. Sodium chlorate is produced via the electrolyticdecomposition of salt, water and energy. The important factors for us to consider regardingsodium chlorate is where the demand for this chemical comes from. 85% of demand for theproduct is derived from the paper and pulp industry, where it is used in the production of the bleach that is used to whiten the paper. The remaining 15% comes from its use as a soilsterilant, in uranium mining and in the production of other chemicals.
Sodium Chlorate Market in USA
Bargaining Power of Customers
Customers include Paper & PulpProducing Companies like GeorgiaPacific and Universal
Because of high competition amongthe sodium chlorate producers, thebargaining power is being increased.
The demand is also increasing at therate of 8 to 10% per year with extrausage in the plant effluent problemsof paper corporations.
Competition within Industry
Highly Competitive Market
Market Leaders like Hooker,Pennwalt, American & Kerr-McGeehave more than 55% of the USMarket
Huge number of small mediumenterprises with active shares in thesodium chlorate market in US
Paper Companies like Universal alsohave their own NaClO3 plants activelyparticipating in the competition.
Companies like Brunswick andSouthern are specialised only inNaClO3 production
Case: American Chemical Corporation
1834 WordsDec 2nd, 20118 Pages
Case: AMERICAN CHEMICAL CORPORATION
1. Executive Summary
Dixon, an American specialty chemical producer, wants to buy Collinsville plant from American Chemical Corporation, another typical chemical company in 1979. Dixon wants to diversify its product line buy acquiring the aforesaid plant, which produces sodium-chlorate to supply to paper producers in Southeastern part of the US. This plant initially cost 12 mln. USD and additional 2,25 mln. USD needed to buy laminate technology to increase efficiency and profitability of the plant in order.
Dixon has conducted thorough marketing research for the industry providing cash flow analysis on purchase of the plant. The cash flow analysis based with and without laminate technology cases, where…show more content…
Now, Dixon needs to re-lever this beta by using its own target capital structure (35%, p.4). The formula for re-levered beta is: βlevered equity = βasset * [1+ (1-t)*D/E] = 1.09*[1+(1-0.48) *0.35/0.65] = 1.40.
b. Weighted average cost of capital (WACC):
Cost of equity: in the case, the yield on Tbonds is 9.5% (p.4). We assume that it is the risk free rate. We use the historical equity risk premium 8.4% stated on the Table 9.2, page 247 of the textbook. According to the CAPM method, the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%.
Cost of debt: because there is little information about Dixon’s debt provided on the case, we assume that all debt Dixon intends to borrow is used in the acquisition of Collinsville plant at 11.25%. We also assume that debt is issued at par. The after-tax cost of debt is (1-0.48)*11.25% = 5.85%.
WACC: we use Dixon’s 35% target level of debt-to-asset ratio in acquiring the plant to calculate cost of capital. WACC = D/V*After-tax cost of debt + E/V*Cost of equity = 0.35*5.85%+0.65*21.26% = 15.87% @ 16%. Therefore, the WACC for Collinsville’s plant cash flow is nearly 16%. We use this cost of capital to calculate NPV of the project.
3. Calculating NPV
To calculate the NPV for the project we have observed two cases during the investment: purchasing the plant without laminate technology and with laminate