Case Stoody 2

1447 Words Nov 11th, 2013 6 Pages
Case Study No. 1: American Chemical Corporation 1. Briefly provide a synopsis of the case and clearly describe the main problem raised in the case. (10 points)
American Chemical, a diverse chemical company in the late1970s, wanted to acquire, through a share buyout, Universal Paper Corporation. Universal sued them on the stance that it would violate an antitrust law, because its sodium-chlorate production division would digest Universal’s large division creating a lack of competition 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
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The beta value was found by taking the average of the two betas: (1.10 + 1.2) / 2 = 1.15

Cost of Equity using CAPM
Rs = rRF + (RPM) β.
Rs = 0.105 + (0.075 * 1.15)
Rs = 19.1%

Weighted Average Cost of Capital t = 48% (See Figure 1 for calculation)
Target Capital Structure (D/E): 0.35 (Taken from page 4)
Wd = 25.9%; 1.35wd = 0.35
We = 74.1%; 100 - Wd
RD = 11.25%
WACC = (1-t) * RD(D/V) + RE(E/V) = (0.52) * .1125 (0.259) + .191 (0.741) = 0.0152 + 0.142 = 15.7%

3. Project the incremental cash flows associated with the acquisition of the Collinsville plant without the laminate technology and estimate the acquisition’s net present value. (25 points)

Assumptions:
Tax rate = 48%
Capital expenditure between 1973-1979 = ($200,000 + $500,000)/2 = $350,000
Capital expenditure after 1979 = ($475,000 + $600,000)/2 = $538,000
PV of FFCF = FFCF discounted at WACC = 15.7%

Below are the calculations

Pro Froma Financial Statements for the Collinsville Plant Without Laminate ('000s) | | 1979 | 1980 | 1981 | 1982 | 1983 | 1984 | EBIT | | $833 | $2,218 | $3,035 | $3,134 | $3,026 | NOPAT (tax = 48%) | | $433 | $1,153 | $1,578 | $1,630 |

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