...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 paper 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 paper 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 (β) 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...
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...1. Should the Board of Directors of Dixon Corporation approve the purchase of the Collinsville plant from American Chemical? The plant location and sodium dioxide product is a good fit for Dixon. Dixon could use its existing infrastructure for Collinsville’s products and it fits well with Dixon’s overall strategy. However Dixon’s future success does not hinge on this deal. This deal financially is dependent on two things: the capital structure of the company and the viability / installation timing of the laminate technology. We believe the capital structure should be 10% debt to match the structure of the comparable NaCl producers like Brunswick and Southern. Without the laminate, this is not a financially sound deal. With the laminate, this is an attractive deal. The laminate development plan, however, is very aggressive and we feel there is too much risk of possible installation delays (or technology issues) which outweighs its possible financial benefits. Therefore, in summary, we would NOT recommend this purchase. 2. What is the cost of capital (WACC) for the Collinsville plant? We assumed that the target capital structure based on comparable companies is 10% debt. The calculated WACC is 16.88%. 3. What are the relevant cash flows for the Collinsville plant? Please see the attached financial analysis for FCFcap for details. We calculated EBIAT using an implied 48.7% tax rate from Dixon’s financials and added back in depreciation, Capx, and net working...
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...chemical company in US, is considering the purchase of a sodium chlorate plant located in Collinsville, Alabama. The Collinsville plant is now managed by American Chemical Corporation (American), one of largest diversified chemical companies in US. Acquisition of the Collinsville plant fit well with Dixon’s strategy of supplying chemicals to paper and pulp industry. Dixon and American had reached an agreement of $12 million purchase price to acquire the Collinsville plant’s net asset. As a part of the deal, American would give Dixon an ongoing technical support of the laminate technology, a new technology developed by American to reduce the power cost by 15% to 20% and eliminate graphite cost. American ensured to realize laminate technology and make it available to the Collinsville plant. The installation of laminate was scheduled for December 1980 and would charge Dixon $2.5 million, one-time cost depreciated over a period of 10 years. Dixon planned to fund the $12 million purchase price entirely with debt capital. This funding plan would temporarily increase Dixon’s book debt-to-total capital ratio to approximately 47% and would initially raise Dixon’s book debt ratio above its target deb ratio for the consolidated company of 35%. To determine the viability of the acquisition, Dixon needs to conduct net present value (NPV) analysis to determine whether Dixon can purchase Collinsville plant and whether Dixon can invest laminate technology. Under the NPV analysis, Dixon...
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...sodium chlorate plant located near Collinsville, Alabama. This provides Dixon Corporation with an opportunity to purchase the plants net assets for the asking price of $12 million. The following analysis is to determine whether or not Dixon should purchase Collinsville plant with debt capital or invest in building a new one. The acquisition is pending approval from Dixon’s Board of Directors. Discussion: Strategy Analysis The purchase of the Collinsville plant offers Dixon an opportunity to grow its market share in the paper and pulp industry. Adding sodium chlorate to its product portfolio will expand its product line and reach in the paper and pulp industry. Dixon and the Collinsville plant have some of the same major customers, which will enable Dixon to market the sodium chlorate through its existing sales team. The Collinsville plant is strategically located in Southeastern U.S., the heart of the paper and pulp industry. This location complements Dixon’s primary facility located in Georgia and creates a localized hub for its sales team. Purchasing the Collinsville plant, provides the following benefits over building a new plant: 1) The Collinsville plant provides the ability to start generating revenue immediately, versus in one to two years. 2) Collinsville’s existing customer base is a benefit since it is harder to acquire new customers than it is to maintain existing ones. 3) Dixon will gain the expertise of the existing Collinsville employees, which is important when...
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...in the Southeast United States. To alleviate this, American Chemical divested that division in a plant they had in Collinsville Alabama, subsequently looking for a buyer, once they were able to acquire 91% of Universal. Dixon, another chemical company was the one for the job and wanted to purchase the Collinsville plant from American Chemical. Dixon’s motive is to diversify itself by obtaining a $12 million sodium chlorate plant to supply to paper producers in the Southeast. However, the plant had begun a new laminate technology to increase efficiency and profitability, and that accounted for an additional $2.25 million. The main question of this case is not whether it was the correct decision for American to acquire Universal; it’s whether it’s a smart decision for Dixon to acquire the Alabama sodium chlorate plant from American Chemical. Dixon must determine the research for a CF Analysis with and without the acquisition of the plant and decide which produces a better NPV. In order to account for all possibilities, a cash flow analysis must be based with and without laminate technology. Attached is our decision and our reasoning: 2. Estimate the cost of equity appropriate for the evaluation of the incremental cash flows associated with the Collinsville investment. Estimate the weighted average cost of capital appropriate for discounting the Collinsville plant’s...
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...1979, American Chemical Corporation (ACC) avoided a preliminary injunction from the US government by agreeing to divest its sodium chlorate plant in Collinsville, Alabama. The result of this action was ACC executing a hostile takeover of Universal Paper Corporation. Now that ACC is required to sell its Collinsville plant, there is an opportunity for Dixon Corporation to acquire the plant for $12 million along with a $2.25 million investment for upgrading to a new technology. Statement of the Problem The CEO and Board of Directors at Dixon Corporation need to decide if they will approve the acquisition of the Collinsville plant at the price and on the terms proposed. Discussion Dixon Corporation The Dixon Corporation is a specialty chemicals company that sells primarily to the paper and pulp industry. Its main plant is located in Calhoun, Georgia, and its sales are focused in the Southeastern United States. Dixon's principal line of products includes sulfuric acid, aluminum sulfate, and liquid sulfur dioxide. The company has been consistently profitable for years, and sales at Dixon have grown from $19 million in 1975 to over $42 million in 1979 . The profits after taxes have nearly quadrupled from 1975 to 1979, and the stock price has gone up five-fold in the same period. The Collinsville Plant The Collinsville plant can produce 40,000 tons of sodium chlorate per year. The facility has 20 cell tanks that house the "D cells". These cells use graphite electrodes...
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...Corporation: The Collinsville Plant (Abridged) Case Analysis Prepared by Renee Meier, Cohort B November 12, 2010 Prepared For Brett Hunkins MBA 634: Measurement II Richard DeVos Graduate School of Management Meier, 2 Dixon Case Analysis Introduction Dixon Corporation, a specialty chemical company is considering the purchase of a sodium chlorate plant in Collinsville, Alabama. This opportunity will allow Dixon to expand its market and product line. Because of the location of the plant and its’ current market share, the Collinsville plant seems to be a good fit with the current business already established at Dixon. Dixon has a successful track record in the specialty chemical business and is evaluating the impact of the purchase. A case analysis is provided to understand the financial implications and to determine under what conditions the purchase should be made if made at all. The Collinsville plant is being sold by American Chemical Company as a condition of their purchase of Universal Paper. They are eager to sell. The asking price is $12 million and they are offering new laminate technology for an additional $2.25 million. The technology has not been fully implemented and is expected to roll out in late 1980, almost a year after the original purchase. American Chemical has pledged product information and technical support throughout the year with full support upon roll out. The case is prepared with two scenarios: Purchase of the Collinsville plant without the...
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...Collinsville case study 1. Which firms are the “identical twins” of the Collinsville investment? Using the β’s for those assets and the methodology learned in this course, determines the appropriate discount rate for the Collinsville investment. We are interested in obtaining the asset beta for Collinsville investment. Here from the reading material, we find there were altogether 6 chemical companies that produce sodium chlorates. They are Hooker, Pennwalt, American, Kerr-McGee, Brunswick and Southern. However, since we are evaluating the addition of a sodium chlorate plant, the two firms (Brunswick and Southern) who specialize in producing sodium chlorate are likely the best “twins”. To determine the asset betas of each company, we need to debt and equity. Here we just use the average number (from year 1977-1978) of debt and equity of each company to calculate it. Since the beta for debt is 0, by plugging these into the unlevering beta calculation of E/(D+E) * βE giving the asset beta column in Table 1. Taking simple average of asset betas giving the number of 0.91. Then we just need to calculate the proper discount rate using CAPM model. Given the risk premium of 6% and risk free rate of 8.5% (9.5%-1%), we get the discount rate (Opportunity cost of capital of the project) which is 14.87%. 2. Calculate the net present value of the Collinsville plant without the laminate technology. Remember that the transaction takes place at the end of 1979. To calculate the...
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...1. I assume the Georgia-Pacific, Brunswick Chemical and Southern Chemicals are the identical twins of the Collinsville investment because their net incomes during the 1974 to 1978 period have extremely high correlation with Collinsville’s net income. Net Income (in millions) | Collinsville | Brunswick Chemical | Georgia-Pacific | Southern Chemicals | 1974 | 1.096 | 0.2 | 164 | 0.1 | 1975 | 0.817 | 0.15 | 148 | -0.05 | 1976 | 2.326 | 0.37 | 215 | 0.28 | 1977 | 4.357 | 0.71 | 262 | 0.74 | 1978 | 4.845 | 0.79 | 302 | 0.73 | Coefficient of Determination | / | 99.9% | 97.6% | 98.1% | | Equity Beta | Debt | Equity | Asset Beta | Brunswick Chemical | 1.1 | 15% | 85% | 0.935 | Georgia-Pacific | 1.5 | 29% | 71% | 1.065 | Southern Chemicals | 1.2 | 21% | 79% | 0.948 | Average Asset Beta | | | | 0.9415 | Eliminate Georgia Pacific from the identical twins list Collinsville’s asset beta is 0.9415. & Risk-free rate = long-term treasury bonds = 9.5%; Market risk premium = 7% Discount rate of Collinsville = 9.5% + 0.9415 * 7% = 16.09% (CAPM) 2. | 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 | Sales (tons) | 32,000 | 35,000 | 38,000 | 38,000 | 38,000 | | | | | | Ave price/ton | 415 | 480 | 520 | 562 | 606 | | | | | | Sales | 13,280 | 16,800 | 19,760 | 21,356 | 23,028 | | | | | | Power | 6,304 | 7,735 | 9,386 | 10,526 | 11,780 | | | | | | Graphite | 645 | 791 | 875 | 940 | 992 | | | | | | ...
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...any) are the problems confronting the company? Dixon Corporation planned to buy Collinsville plant from American Chemical Corporation for $12 million and another $2.25 million of installation cost of laminated electrodes. The problem is if Dixon should purchase the Collinsville plant with the laminated electrodes program based on the pro forma financial statements they conducted. (2) How did the problems arise? When American Chemical Corporation tried to buy the Universal Paper Corporation, Universal’s management sued that American’s acquisition of Universal would violate the antitrust laws. At the end, American agreed to divest its sodium chlorate plant located near Collinsville, Alabama. After the acquisition, Dixon Corporation agreed to buy the Collinsville plant because it fitted well with Dixon’s strategy of supplying chemicals to the paper and pulp industry. Sodium chlorate would complement Dixon’s existing product lines. But the development and application of the new technology of laminated electrodes generates much uncertainty on the costs and the future returns. In addition, the $12 million would be financed by debt capital, which would generate interest costs and increase the debt ratio over the targeted one. (3) Does the management adequately understand the problems and their causes? Yes. The management already generated pro forma financial statements for the Collinsville plant and the cost of the acquisitions. (4) What (if any) solutions to the problems...
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...Bilal Al- Qureshi, Said Business School, University of Oxford 2010 American Chemical Corporation HBS Case Number: 9-290-102 Executive Summary The American Chemical Corporation (AMC) is a large, diversified chemical producer. In 1979, AMC was forced to issue a tender to sell a Sodium Chlorate plant, near Collinsville, Alabama. Dixon, a specialty chemicals company, was willing to purchase the aforementioned plant for $12m with the option to invest a further $2.25m on laminate technology. The subsequent investment in Laminate technology was expected to eliminate graphite costs and reduce power consumption at the Collinsville plant by 15% to 20%. We will evaluate the acquisition of the Collinsville by Dixon at the proposed price. Table 1 identifies the assumptions that have been used for the evaluation of this acquisition. Table 1 Assumptions Laminate Technology reduces power by a mean of 17.5% Laminate Technology is depreciated over 10 years Sodium Chlorate price growth is 8%, per annum Power cost (per KWH) growth is 12%, per annum Plant Life is 10 years Plant Salvage Value is zero EBIT is flat after 1984 Capital Expenditures: $600,000 per annum after 1984 Net Working Capital Remains flat after 1984 Definition of “Flat” Reference Pg 3, HBS 9-280-102 Pg 3, HBS 9-280-102 Pg 4, HBS 9-280-102 Pg 4, HBS 9-280-102 Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 4 http://www.imf.org/external/pubs/ft/wp/2006/wp06218...
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...Universal, alegó que su adquisición por parte estadounidense reduciría sustancialmente la competencia en el sodio clorato de negocio, especialmente en el sudeste de mercado de los EE.UU., donde las dos empresas se competidores. El gobierno de EE.UU. se unió a Universal en la búsqueda de un mandamiento judicial para poner Oferta estadounidense de licitación. A pesar de que negó las acusaciones, American impedido preliminar orden judicial al acordar la venta de su planta de clorato de sodio, situado cerca de Collinsville, Alabama, en el evento adquirió Universal. Estadounidense posteriormente fue un éxito en la adquisición de más del 91% de Acciones de Universal. En octubre de 1979, American comenzó a buscar un comprador para la planta de Collinsville. Una serie de los posibles compradores se acercó, incluyendo la Corporación de Dixon, una compañía de especialidades químicas. Tras largas negociaciones, Dixon acordó la compra de los activos netos de la planta de Collinsville Estadounidense por US $ 12 millones, sujeto a la aprobación de su junta directiva. El mercado de clorato de sodio El clorato de sodio (NaClO3) fue un químico producido por la descomposición electrolítica de sal (NaCl) de acuerdo con la...
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...American Chemical Case The American Chemical Corporation wanted to buy any and all shares of the Universal Paper Corporation because of their combined efforts in the production of sodium chlorate. To do so without violating the Clayton Act, American agreed to sell their Collinsville production plant to Dixon Corporation. Dixon wants to buy the Collinsville plant to help diversify its specialty chemical product line. This plant initially cost 12 million dollars with an additional 2.25 million dollars needed to buy laminate technology to increase efficiency and profitability of the plant in order. Cash flow analysis with and without the laminate technology will show whether or not Dixon should go further with purchasing the plant. The cost of equity can be calculated as follows. In the case, the yield on Treasury bonds is 9.5%, which is assumed to be the risk free rate. Using a historical equity risk premium 8.4%, the CAPM method says the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%. Since little information about Dixon’s debt is provided in the case, I assumed that all debt Dixon intends to borrow is used in the acquisition of Collinsville plant at 11.25%. We also assume that debt is issued at par. The after-tax cost of debt is (1-0.48)*11.25% = 5.85%. Dixon’s target level of debt-to-asset ratio is 35%, which is used to find the cost of capital: WACC = D/V*After-tax cost of debt + E/V*Cost of equity = 0.35*5.85%+0.65*21.26% = 15.87%. Calculating NPV without...
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...for the Collinsville Plant. The proforma statement is presented in Exhibit 8 of the case. • Estimate the FCF for the period 1980 – 1984 or the period 1980 – 1989. If you use the 10 year forecast, assume the net operating flows are constant from 1984 through 1989, that working capital does not change, i.e., it is zero; and property, plant and equipment (PPE) continues the same trend throughout the 10 year period. Also assume capital investment is $600,000 for the period 1985 through 1989 and assume the depreciation increases $60,000 annually for the period 1985-1989. • Free Cash Flow = Net Operating Profits After Tax + Capital Investment + Change in Working Capital. An inflow of cash is a + and an outflow of cash is a -. The tax rate is .48 and NOPAT = NOP (.52). Capital Investment = change in PPE + depreciation expense, and change in working capital is the change in the three WC items between two years. That is, in 1979 NWC = $1400 and in 1980 NWC =$1196. Therefore, the cash flow related to working capital is an inflow of $204. That is working capital decreased, thereby creating an inflow of cash in 1980. II. Justify the cost of capital used to discount the FCF. III. Estimate the present value of the cost savings that result from the lamination process applied to the graphite electrodes. This is discussed at the bottom of page 3 of the case and the data are found in Exhibit 8. IV. What is the value of the Collinsville plant...
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...Dixon Corporation, an American specialty chemicals producer, wants to buy Collinsville plant in October 1979 from American Chemical Corporation, another typical chemicals company. This plant initially costs $ 12 million, and additional optional $ 2.25 million needed to buy and install laminate technology to increase efficiency and profitability of the plant in order. A firm that is operating in the interests of its shareholders should accept all projects that increase the wealth of the shareholders. In the case of Collinsville, we have used the Net Present Value to make our recommendations. We could also have used another criterion: the Internal Rate of Return (IRR). All the details of the calculation of the NPV are in appendices attached (calculation of the WACC, which is 14,183%, and the NPV with and without laminate technology). Based on our calculations, without the laminate technology, the NPV of Collinsville turns out to be negative ($ 1 714.13 thousands). Thus, we do not recommend investing in this project since it is against shareholders’ interests. However, with the laminate technology that enables to cut power costs (which are the main charge) and eliminate graphite costs, the NPV of the project becomes positive ($ 2 409.23 thousands). In that case, we do recommend acquiring Collinsville plant, because it increases the wealth of the shareholders and it enables Dixon to complement its strategy of supplying chemicals products to the paper and pulp industry. Moreover...
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