Nova Chemical

Topics: Capital asset pricing model, Stock, Weighted average cost of capital Pages: 4 (1081 words) Published: April 9, 2008
What is Nova Chemical’s strategy? How do the various divisions relate to the firm’s overall strategy?

Industry analysts are expecting high growth rates for specialty chemicals of 10-15%. As a result, Nova Chemical has a 5 year strategy that focuses on development of the company’s two specialty chemicals divisions: the Laboratory Products Division (LPD) and, more substantially, the Environmental Products Division (EPD). Investment will focus on the company’s EPD division through expansion of new production facilities. Doing so will require the company to consider alternatives in annual financing to handle the sharp increases in needed capital spending. One alternative includes the sale of Nova’s Industrial Products Division which makes non-specialty, basic chemicals. Due to the commoditized nature of basic chemicals, profitability of such is low and is expected to continue to experience downward pricing pressure for the foreseeable future. Despite the fact that the IPD represents the origins of Nova Chemical, the division is not viewed as a favorable addition to the company’s overall corporate strategy, but could prove to support Nova’s financing plan for its business operations strategy. The most important item to consider will be the impact of the sale on the stock price of Nova Chemical overall as a substantial divestment in the company is expected from one of the company’s founders.

Compute Nova Chemical’s weighted average cost of capital.

Nova Chemical's 1989 WACC

Common Shares15.2(Exhibit 7)
Price per Share33.00(5-Year Average)
Equity (mkt value)501.6

Bank Debt84.5(Exhibit 7)
Current Portion LTD10(Exhibit 7)
Long Term Debt240(Exhibit 7)
Interest Bearing Debt334.5

SourceAmount (MM)% of TotalTax CostWeighted Cost
Debt (book value) 334.5 40.0%6.6%2.62%
Equity (mkt value) 501.6 60.0%17.6%10.57%
Average Tax Rate40.0%Pro Forma Avg....
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