GROUP SUBMISSION: Due 27 June 2011 Midnight American Chemical Corporation CASE QUESTIONS Read the American Chemical Corporation case that was handed to you. The underlying question to be answered is should Dixon acquire the Collinsville plant. In your case write-up, you can discuss the questions given below. Please note that the given questions are to be used only as a guide for your discussion. You do not need to answer the questions in the sequence they are presented. You can use the spreadsheet called AmericanChemCorp.xls (posted on instructor) to do your computations. Financial analysis 1. Extract all the important information given in the case study (text, footnotes and exhibits) that you will need as part of your set of assumptions in cash flow analysis, e.g. the marginal tax rate, net working capital, salvage value of the Collinsville plant, etc. 2. Using the information extracted in (1) above and relevant tables in the exhibits, estimate the expected incremental free cash flows associated with the acquisition of the Collinsville plant a. Without the laminate technology. b. With the laminate technology. 3. What is the IRR for the Collinsville investment with and without the laminate technology? Using the IRR, which of the two options is better? Estimating the discount rate 4. What is the appropriate beta for the Collinsville project? 5. Estimate the cost of equity capital appropriate for the evaluation of the incremental cash flows associated with the Collinsville investment. 6. Determine the after-tax cost of debt for the project. 7. Estimate the weighted average cost of capital (WACC) appropriate for the valuation of the Collinsville investment. Project Valuation 8. Using the discount rate determined above, estimate the net present value (NPV) of the Collinsville investments a. without the laminate technology b. with the laminate technology 9. Should Dixon Corporation acquire the plant? Is the Collinsville investment attractive on economic grounds?...

...Case: AMERICANCHEMICALCORPORATION
1. Executive Summary
Dixon, an American specialty chemical producer, wants to buy Collinsville plant from AmericanChemicalCorporation, 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 the company should decide whether it should go on further to buy that plant and technology.
2. Calculating of WACC
2.1 ASSUMPTIONS FOR CALCULATIONS IN THE CASE:
l Plant life is 10 years (p.4)
l Salvage value of plant is 0 (p.4)
l Book value of plant at end of 1979 is 10.6 million (=12 million purchase price - 1.4 million working capital)
l Tax rate is 48% (calculated from Exhibit 7)
l For the period from 1980 to 1984: all data of sales, depreciation and manufacturing and other costs are given in the case (Exhibit 8)
l For the...

...report considers the potential purchase of the sodium chlorate producing plant in Collinsville, Alabama by Dixon Corporation from AmericanChemicalCorporation in October 1979. The reason for this stems from the fact that AmericanChemicalCorporation was attempting at the time to buy a controlling stake in Universal Paper Corporation, but the management of Universal contested this on the basis that it would be anti-competitive, given that they were both producers of sodium chlorate. The US government supported Universal in this belief and in order to prevent court action American had to agree to divest its sodium chlorate producing plant in Collinsville, Alabama. As of October of 1979 Dixon has agreed to purchase the plant in principal, and is awaiting approval from their board of directors.
2) Sodium chlorate is produced via the electrolytic decomposition of salt, water and energy. The important factors for us to consider regarding sodium chlorate is where the demand for this chemical comes from. 85% of demand for the product 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 soil sterilant, in uranium mining and in the production of other chemicals.
3) Dixon Corporation are the...

...“AmericanChemicalCorporation” Case Summary
The key problem in this case is should Signal decide to approve the acquisition of the Collinsville plant at the price and on the terms proposed in the case
As per an agreement with the government, AmericanChemicalCorporation needed to sell the Collinsville plant after the acquisition of Universal PaperCorporation, or it be in violation of the anti-trust law. In the case, Signal agrees to buy the entire assets of the Collinsville plant at the price of $12 million.
The key to solving this case is the valuation of the Collinsville plant. For Signal, the purchase of Collinsville plant is like undertaking a new project. So this case can be translated into a capital budgeting problem. If the present value of this acquisition can be figured out, then the case is solved.
The first step of working out the present value is to determine the cash flow of each period. Both in the case materials and in the exhibits, there are some data for the entire industry and for several of the largest companies in the country. From those data, the growth rate and forecasted cash flow can be derived. In Exhibit 8, a pro forma financial statement for the Collinsville plant has already been given. Some adjustment can be given to the pro forma...

...Summary
AmericanChemical Corporation’s Collinsville plant in Alabama is being sought by Dixon a speciality chemicals company. This plant mainly specialises in Sodium Chlorate production and fits well with Dixon’s strategy of supplying chemicals to paper and pulp industry. It would also complement Dixon’s existing product line. The plant costs $12million in investment and requires up to$ 2.25 million for upgrading to new technology.
An in-depth investigation and analysis is conducted for both the company and the industry to accurately determine the worth of investment in the Collinsville plant. Net present values are calculated for all possible scenarios. After a thorough analysis of the data, suitable recommendations are provided.
Table of Contents
Executive Summary 2
Introduction 4
About The Collinsville Plant 4
Sodium Chlorate Market in USA 4
Issues surrounding Collinsville opportunity 5
Valuation 5
Using NPV Rule for the project – Without Laminated Electrodes 6
Using NPV Rule for the project – With Laminated Electrodes 6
Calculations of Beta 7
Debt/Equity ratio 7
Monte Carlo Analysis 7
For the Unlaminated factory 7
Recommendations 8
Exhibits 9
Exhibit 1: Using NPV Rule for the project – Without Laminated Electrodes (Full Table) 9
Exhibit 2: Using NPV Rule for the project – With Laminated Electrodes (Full Table) 10
Introduction
Dixon, an American specialty...

...project
Now, we need to lever this beta in order to get the equity beta of our project of buying the plant. We use the ratio D/V = 35% which is the target debt ratio for the consolidated company (page 4 of the case).
So, β_l of the project is 1.6.
Weighted average cost of equity (WACC)
We know that the return on equity is Ke=Rf+β_l×RMP with:
Rf the risk free rate. Assumption: we take the long-term Treasury bonds rate of 9.5% (foot note 2 of page 4).
β_l the beta levered of the project, ie the equity beta we have calculated = 1.59
RMP the risk market premium. Assumption: we take 6%.
As a result, we have Ke=19.07%.
Then we know that WACC=E/V×K_d×(1-T)+D/V×K_e with:
E/V the equity/value of the company
D/V the debt/value of the company
K_dthe cost of debt. According to the page 4, we have K_d=11.25%
T the corporate taxes. According to the exhibit 7, we have T=47.5% to 48.7% between 1975 and 1979. Assumption: we will keep the taxes rate at T=48.7% from 1979.
As a result, we have WACC = 14.4%.
Estimate the incremental cash flows
Without laminate technology
Assumptions:
We forecast the Free Cash Flows for the whole expected life of the plant which is 10 years (footnote 1 page 4).
For the years 1980 to 1984, we keep the assumptions of the case given in the exhibit 8.
For the years 1985 to 1989, we take the following growth assumptions:
The sales will stay at 38,000 tons per year.
For the R&D cost, we assume...

...Executive Summary
Statement of the problem
In October of 1979, the AmericanChemicalCorporation (ACC) began looking for a buyer for the Collinsville, Alabama plant after successfully acquiring 91% of the shares of Universal Paper Corporation. Dixon Corporation, a specialist chemical company with customers primarily in the paper and pulp industry agreed to the possibility of purchasing the Collinsville plant for $12 million. This purchase will diversify Dixon’s product line, adding the sodium chlorate chemical, produced at the Collinsville plant, needed by its existing customers. Dixon is evaluating different streams of cash flows for the possibility of purchasing the Collinsville plant.
Discussion
The decision to acquire Collinsville’s plant will translate into strategic and economic benefits. Dixon could increase their supply of chemical products to their existing clients. However, first we looked in to the risk of the possible venture. Dixon has never produced sodium chlorate which could add risk to the new venture. For this reason we calculated the beta of the project based on the beta of the sodium chlorate industry. We focused on Brunswick and Southern Chemical which are pure play sodium chlorate companies. The average unleveraged beta obtained from the two companies is 1.035 which reflects the risk of the project. Adjusting Dixon’s...

...AmericanChemicalCorporation
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.[1]
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...

...
Marriott Corporation
The Cost of Capital
Author
Student Number
董晖
林桐
吴正浩
祝承懿
Shanghai Advanced Institute of Finance, Shanghai Jiao Tong University
Table of Contents
Background
The hurdle rate is the required return or opportunity cost of each division and company. Only project with positive NPV discounted by hurdle rate will be invested, and the total return of Marriott up to all projects invested. Though there are many subjective aspects in estimation of WACC, common view and accepted formula will be adopted to calculate WACC, discretion if prudent used.
Key factors
1. Key factors of debt
a) Tax rate
Tax rate is based on state policy and net income of the company. Since tax rate of 1988 is not expected to change, tax rate of 1987 is the best estimation of rate of 1988, will be 44.10%.
b) Bench mark bond
Lodging division uses long term debt for debt, and based on going concern, 30-year bond rate is selected as bench mark, which is 8.95%。
Contract services division and restaurant division uses short-term debt rate, that is 1-year U.S. Government rate equals to 6.9%, also taken as risk free rate.
c) Bond rate of division and Marriott
As there are both floating and fixed rate bonds among divisions and Marriott, the bond rate can be calculated as
Bond rate of Division or Company =
Fraction of Debt at Floating *(Bench Mark Rate +Premium)
+ Fraction of Debt at Fixed * Fixed bond rate
d) Weight of...