American Checmical Corporation

Topics: Net present value, Investment, Depreciation Pages: 3 (743 words) Published: April 23, 2009
American Chemical Corporation

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 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...
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