American Chemical Corporation Case Summary
“American Chemical Corporation” 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, American Chemical Corporation needed to sell the Collinsville plant after the acquisition of Universal Paper Corporation, 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 statement according to the analysis of the industry. Then we can take out the net income plus depreciation of each year, which will be the cash flow using in the following steps.
One important thing that should be added to the projected cash flow is the terminal value. From analysis above, the growth rate of the cash flow is known. Then the discount factor should be worked out. As the debt will be finally repaid in the near future, the discount factor will be the cost of equity. Using CAPM model, and the Hamada Equation and the data of the other companies in the same industry, the discount factor can be derived. We need to use the pure play approach to determine the beta of the Collinsville plant. The
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, American Chemical Corporation needed to sell the Collinsville plant after the acquisition of Universal Paper Corporation, 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 statement according to the analysis of the industry. Then we can take out the net income plus depreciation of each year, which will be the cash flow using in the following steps.
One important thing that should be added to the projected cash flow is the terminal value. From analysis above, the growth rate of the cash flow is known. Then the discount factor should be worked out. As the debt will be finally repaid in the near future, the discount factor will be the cost of equity. Using CAPM model, and the Hamada Equation and the data of the other companies in the same industry, the discount factor can be derived. We need to use the pure play approach to determine the beta of the Collinsville plant. The