Case: American Chemical Corporation
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 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 period from 1984 to 1989 we use the below assumption:
- Price growth rate is 8% (p.4)
- Power cost growth rate is 12% (p.4)
- Net working capital is always 9% of sales (Exhibit 8, current asset and liability items remain historical to sales)
- PPE and depreciation are based on historical data in 1980-1984 period (Exhibit 8)
- Capital investment are based on historical data in 1980-1984 period (Exhibit 8)
- Variable and fixed costs: we use 4-year average growth rates calculated based on Exhibit 8. So non-power variable cost growth rate is 11%, fixed cost growth rate is 6%, selling expenses growth rate is 7% and R&D expenses growth rate is at 5%
- To use this 4-year average growth rates, we
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 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 period from 1984 to 1989 we use the below assumption:
- Price growth rate is 8% (p.4)
- Power cost growth rate is 12% (p.4)
- Net working capital is always 9% of sales (Exhibit 8, current asset and liability items remain historical to sales)
- PPE and depreciation are based on historical data in 1980-1984 period (Exhibit 8)
- Capital investment are based on historical data in 1980-1984 period (Exhibit 8)
- Variable and fixed costs: we use 4-year average growth rates calculated based on Exhibit 8. So non-power variable cost growth rate is 11%, fixed cost growth rate is 6%, selling expenses growth rate is 7% and R&D expenses growth rate is at 5%
- To use this 4-year average growth rates, we