Hanson Private Label: Evaluating an Investment in Expansion

1109 WordsFeb 15, 20145 Pages
1. How would you describe HPL and its position within the private label personal care industry? Hansson Private Label (HPL) is a manufacturer of products such as soap, shampoo, mouthwash, shaving cream, sunscreen and other personal care products. Its mission is to be a leading provider of high-quality private label personal care products to America’s leading retailers. The main topic of this paper is to evaluate a new investment of 50 million for a private label manufacturing proposal by a key partner. This will increase debt but bring new customers and new opportunities. However it also brings risks to lose some existing customers on the long run. The project mainly spans in 3 years. So Hansson is evaluating the return on…show more content…
So for anything beyond 3 years we feel the capacity utilization will max up at around 70% 3. WACC calculation WACC is the appropriate discount rate to use for cash flows with risk that is similar to that of the overall firm. Hansson is concerned that the risk of this project is not similar to the risk of current overall firm’s activities. With this project, the company was taking on much more debt and, Hansson believed that, this project could very well change the risk profile of the firm. Based on the assumptions provided by the CFO, the new D/V would become 20.9% (from existing value of 9.7%). This would suggest to use the WACC calculated at 9.38% (for D/V of 20.0%). If this project were similar in risk to the firm’s current overall risk profile, this would be the WACC discount rate to apply to the project. Since Hansson believes that the risk of this project is greater than the firm’s current risk profile, we should not use the WACC value of 9.38%. We would need to apply a higher discount rate. All else equal, the WACC of a firm increases as the beta and rate of return on equity increases, as an increase in WACC notes a decrease in valuation and a higher risk (1). Since Hansson believes the risk of the firm will increase, a higher WACC should be applied to the project . Assumptions: 10-Year Treasury 3.75% Market Risk Premium 5.00% Tax Rate 40.0% Est. Hansson EBITDA Multiple 7.0x Est. Hansson Enterprise Value

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