financial analisyst

Introduction

Dixon Corporation , a U .S .-based chemical company , is mulling on buying a plant from American Chemical Corp . American Chemical 's Collinsville plant makes sodium chlorate for the and pulp industry . Dixon will have to pay 12 million as purchase price for the plant . It may also pay 2 .25 million to complete the laminate technology developed by the plant 's research and development staff , which is expected to improve the plant 's efficiency Dixon already has transacted business with some of American Chemical 's major customers . Dixon , however , believes that

the acquisition will enable it to widen product lines and penetrate the and pulp industry Analysis To determine the economic feasibility of the acquisition , we can compute for the NPV of the acquisition , with or without the new technology . The NPV will show whether the Collinsville purchase will increase shareholder 's wealth or lead the company to insolvency . Under the net present value method , the weighted average cost of capital is used as the discount rate to calculate the present value of future cash inflows Hence , for the case study , we will compute for the WACC , prepare projected cash flows then compute the NPV Solution WACC The all-equity beta ) of Dixon is 1 .06 . We assume that we could have a beta of 1 .9 for the production of sodium chlorate , basing from the betas of other chemical firms . We could re-lever Dixon 's beta by using its 35 target capital structure . Using the formula ?levered equity ?all-equity [1 (1-t D /E] 1 .09 [1 (1-0 .48 0 .35 /0 .65] , we 'll have a ?levered of 1 .40 We compute for the WACC , the required rate of return for equity , using the Capital Asset Pricing Model . We use the 9 .5 yield on Treasury bonds , and the 8 .4 equity risk premium . Using the formula r rf ?leveredRP , we get 9 .5 1 .40 8 .4 21 .26 . We presuppose that the Dixon 's debt will solely be used for the Collinsville acquisition Assuming debt at 11 .25 , we can compute for the aftertax cost of debt as (1-0 .48 11 .25 equaling 5 .85

We can now compute for the weighted average of the costs of debt and equity funds , noting that target debt-to-equity ratio is 35 . The WACC using the formula WACC D /V After-tax cost of debt E /V Cost of equity 0 .35 5 .85 0 .65 21 .26 16 Cash Flow We use the historical cash flow for 1980 to 1984 , and projected cash flow for 1985 to 1989 , using this information -- Historical data will be used for property plant and equipment and depreciation costs -- Prices increase 8 annually -- Power expenditures increase 12 each year -- Net working capital is 9 of revenues -- we use the average figures for 1980 to 1984 to project other costs - non-power variable costs rate is 11 per year , selling expenses increase 7 , fixed cost increase 6 , R D expenses...