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    Dixon Corporation is considering acquiring a sodium chlorate plant from American Chemical Corp for $12 million. The plant could improve its efficiency with a new $2.25 million technology. Dixon believes this would allow it to expand its product lines and penetrate the pulp and paper industry. To evaluate the economic feasibility, the financial analyst will calculate the net present value (NPV) of the acquisition with and without the new technology. The NPV uses the weighted average cost of capital (WACC) as the discount rate to determine the present value of future cash flows. The analyst outlines how they will calculate the WACC using Dixon's capital structure and costs of debt and equity. They will also project cash flows using

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    Dixon Corporation is considering acquiring a sodium chlorate plant from American Chemical Corp for $12 million. The plant could improve its efficiency with a new $2.25 million technology. Dixon believes this would allow it to expand its product lines and penetrate the pulp and paper industry. To evaluate the economic feasibility, the financial analyst will calculate the net present value (NPV) of the acquisition with and without the new technology. The NPV uses the weighted average cost of capital (WACC) as the discount rate to determine the present value of future cash flows. The analyst outlines how they will calculate the WACC using Dixon's capital structure and costs of debt and equity. They will also project cash flows using

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    Dixon Collinseville

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    Dixon Corporation is considering acquiring a sodium chlorate plant from American Chemical Corp for $12 million. The plant could improve its efficiency with a new $2.25 million technology. Dixon believes this would allow it to expand its product lines and penetrate the pulp and paper industry. To evaluate the economic feasibility, the financial analyst will calculate the net present value (NPV) of the acquisition with and without the new technology. The NPV uses the weighted average cost of capital (WACC) as the discount rate to determine the present value of future cash flows. The analyst outlines how they will calculate the WACC using Dixon's capital structure and costs of debt and equity. They will also project cash flows using

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    434 views7 pages

    1

    Uploaded by

    latecircle
    Dixon Corporation is considering acquiring a sodium chlorate plant from American Chemical Corp for $12 million. The plant could improve its efficiency with a new $2.25 million technology. Dixon believes this would allow it to expand its product lines and penetrate the pulp and paper industry. To evaluate the economic feasibility, the financial analyst will calculate the net present value (NPV) of the acquisition with and without the new technology. The NPV uses the weighted average cost of capital (WACC) as the discount rate to determine the present value of future cash flows. The analyst outlines how they will calculate the WACC using Dixon's capital structure and costs of debt and equity. They will also project cash flows using

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    financial analisyst

    Introduction

    Dixon Corporation , a U .S .-based chemical company , is mulling on buying a plant from American Chemical Corp . American Chemical 's Collinsville plant makes sodium chlorate for the and pulp industry . Dixon will have to pay 12 million as purchase price for the plant . It may also pay 2 .25 million to complete the laminate technology developed by the plant 's research and development staff , which is expected to improve the plant 's efficiency Dixon already has transacted business with some of American Chemical 's major customers . Dixon , however , believes that

    the acquisition will enable it to widen product lines and penetrate the and pulp industry Analysis To determine the economic feasibility of the acquisition , we can compute for the NPV of the acquisition , with or without the new technology . The NPV will show whether the Collinsville purchase will increase shareholder 's wealth or lead the company to insolvency . Under the net present value method , the weighted average cost of capital is used as the discount rate to calculate the present value of future cash inflows Hence , for the case study , we will compute for the WACC , prepare projected cash flows then compute the NPV Solution WACC The all-equity beta ) of Dixon is 1 .06 . We assume that we could have a beta of 1 .9 for the production of sodium chlorate , basing from the betas of other chemical firms . We could re-lever Dixon 's beta by using its 35 target capital structure . Using the formula ?levered equity ?all-equity [1 (1-t D /E] 1 .09 [1 (1-0 .48 0 .35 /0 .65] , we 'll have a ?levered of 1 .40 We compute for the WACC , the required rate of return for equity , using the Capital Asset Pricing Model . We use the 9 .5 yield on Treasury bonds , and the 8 .4 equity risk premium . Using the formula r rf ?leveredRP , we get 9 .5 1 .40 8 .4 21 .26 . We presuppose that the Dixon 's debt will solely be used for the Collinsville acquisition Assuming debt at 11 .25 , we can compute for the aftertax cost of debt as (1-0 .48 11 .25 equaling 5 .85

    We can now compute for the weighted average of the costs of debt and equity funds , noting that target debt-to-equity ratio is 35 . The WACC using the formula WACC D /V After-tax cost of debt E /V Cost of equity 0 .35 5 .85 0 .65 21 .26 16 Cash Flow We use the historical cash flow for 1980 to 1984 , and projected cash flow for 1985 to 1989 , using this information -- Historical data will be used for property plant and equipment and depreciation costs -- Prices increase 8 annually -- Power expenditures increase 12 each year -- Net working capital is 9 of revenues -- we use the average figures for 1980 to 1984 to project other costs - non-power variable costs rate is 11 per year , selling expenses increase 7 , fixed cost increase 6 , R D expenses...

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