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Dixon Corporation Case Analysis

1) Estimate the WACC that is appropriate for discounting the Collinsville plant’s incremental cash ows. You should estimate
and present each component of the WACC separately, explaining brie y but clearly what assumptions you are making for
each of them. In the same spirit, estimate the appropriate all-equity cost of capital for the APV-based valuation. WACC
calculation. WACC = RD*(1-t)*D/(D+E)+RE* E/(D+E) Cost of equity We assume that risk free rate (Rf) equals rate of long-term
Treasury Bonds (as the project’s life is 10 years), so Rf = 9. 5%. According to Aswath Damodaran equity risk premium in the US
in 1979 was 6. 5%, thus Rm – Rf = 6. 45%. We will estimate beta equity using data of comparable rms, focusing on
production only sodium chlorate: Brunswick Chemical and Sothern Chemicals. To calculate beta asset we’ll use information
about beta equity and equity-to-value ratio. As well we assume that debt beta equals zero: To adjust beta in accordance with
project we assume that in the long-run Dixon will maintain its target debt-to-capital ratio in proportion of 35%. Thus, we get
the following beta asset of the project that accounts for Dixon’s capital structure: Betaproject = 0. 94/(1-0. 35) = 1. 45

RE = Rf + Bproject*(Rm-Rf) = 9. 5% + 1. 45*6. 45% = 18. 85% Cost of debt We assume that cost of debt equals 11. 25% as
Dixon issue bonds at this rate for the purpose of this project nancing. Marginal tax rate = 3,818/(3,818+4,024) = 48,68%
RD*(1-t) = 11. 25%*(1-48. 68%) = 5. 77% WACC WACC = RD*(1-t)*D/(D+E)+RE* E/(D+E) = 5. 77%*0. 35 + 18. 85%*0. 65 = 14. 27%.
APV-based evaluation The rate we’re looking for APV evaluation is return on equity if this project is 100% equity nanced. So
we use unlevered average beta for evaluation as equity-to value ratio equals 1. Betaequity = Betaasset = 0. 94

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