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The Atlantic Corporation Case Essay

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Case 1 Atlantic Corporation

Maastricht University School of Business and Economics Corporate Governance and Restructuring

1. Is the acquisition of Royal’s linerboard mill and box plants a sound strategic move? Consider the short- as well as long-term outlook for linerboard prices and the profitability of the linerboard industry. Furthermore, what basis, if any, is there for expecting AtlanticRoyal’s combined linerboard and box mill operations to do better/worse than the industry overall?

The background information about the industry and also a detailed description of the competing firms represent a good base for evaluating the firm’s decision making when engaging in the purchasing project.

From industry background perspective …show more content…

As we know, Atlantic Corporation was considered as one of the nation’s largest forest products producer, its operations in the linerboard industry have not been strong. Hence, if Atlantic purchased Royal’s Monticello mill, it would increase its profit margin greatly. Additionally, it was expected that 1984 would be a healthy year for this industry, the chances got higher again that Atlantic could position well in the overall industry.

2. Is the price of $319 million reasonable for the Monticello Mill and Box Plants based on a cash-flow analysis? Assume cash flows consistent with Table A, Table B and Exhibit 3, a discount rate of 13%, and a terminal value equal to the book value of assets in1993.

Since this case deals with the purchase of cash flow generating assets, we will conduct a cash flow analysis in order to determine the financial validity of Atlantic Corporations’ offer.

(1)
FCFF EBIT(1 T ) Depreciation GrossFixedAssetExp. NetWorkingCapital

The above formula isolates free cash flows to the firm from earnings before interest and tax (EBIT). It can be noted that FCFF are after tax (1-T) but prior to interest expense. This initial overstatement of due tax is by design; the tax deductibility of interest payments will be accounted for when incorporating the after-tax cost of debt in the weighted average cost of capital (WACC) to determine the present value of free cash flows.

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