Issues surrounding Collinsville opportunity
1. Impact on revenues: Reduction in margins due to overcapacity: Although sodium chlorate prices were expected to increase, the overcapacity would cause number of tons to reduce (competition) and therefore, hit the margins. 2. Impact on costs: Increase of electricity from $0.019 in 1977 per kWh to $0.025 per kWh in 1979. Besides, due to upward revaluation of assets, depreciation was expected to increase. 3. Impact from adoption of technology: Depreciation would increase and Dixon was required to pay all costs related to the installation of laminated electrodes. 4. Impact of Financing of acquisition: Temporarily increase Debt to capital ration to 47%. Target debt to capital ratio: 35%. Therefore, potential impact on credit ratings.
Economic valuation of the Collinsville plant
We start the valuation of Collinsville plant by looking at the discount rate, then NPV and liquidation value.
Discount Rate (WACC):
Firstly, we look at the beta of the plant ' since it is not a publicly traded company, we will use comparables approach to compute the beta. Since, Dixon produces specialty chemical products and not Sodium Chlorate; therefore, Dixon’s beta may not be appropriate. We therefore, would use industry level beta using firms provided in exhibit 5 of case. We would however exclude Brunswick & Southern Chemicals since they are very small and there stock trading volume may be skewed. Then we re-lever the beta. Next, we can determine the cost of equity by using CAPM based on T-bonds and take historical risk premium. Cost of debt can be taken as 11.25% as the financing requires the same rate. The weight would be Dixon’s target debt ratio of 35%.
Net Present Value (NPV):
We would conduct a scenario analysis to determine the NPV without and with lamination technology. Using the cash flow estimates provided in exhibit 8 and using WACC computed above we can find the NPV under no...