American Chemical Essay

592 Words3 Pages
Statement of the Problem In October 1979, Dixon Corporation (Dixon) is considering the purchase of a sodiumchlorate plant located near Collinsville, Alabama. The acquisition of the Collinsville plant wouldsupport Dixon’s strategy of supplying chemicals to the paper and pulp industry. The plant iscurrently operated by American Chemical Corporation (American), who has offered to sell the plant’s net assets for $12 million. American has been developing a permanent laminate to applyto graphite electrodes made in the plant, which would eliminate graphite costs and reduce the power needs of the plant by 15-20%. It can be installed in December 1980 for $2.25 million,which would then be depreciated over a period of 10 years. Dixon has several options: it canchoose not to install the laminate technology and sell the plant at the end of either 5 or 10 years,or invest in the laminate and sell the plant at the end of its life of 10 years. If Dixon chooses to purchase the plant, it plans to fund the entire purchase with debt at a target debt ratio of 35%. Anet present value (NPV) analysis will be used to determine the value of installing the laminatetechnology as well as whether Dixon should approve the acquisition at the price offered. Discussion After comparison of the unlevered betas of similar “pure - play” sodium chlorate manufacturers, the result was levered at a 35/65 debt-to-equity ratio to get a 1.59 beta for theinvestment. At a 48% income tax rate, the weighted average cost of capital is 16%. Dixon hasthe option to purchase the plant and choose not to install the technology, instead selling the plant’s assets at boo k value at the end of 5 years. The total present value of inflows amounts to$10.07 million, giving the acquisition an NPV of ($1.93) million for this option.Dixon is also considering continuing the cash flows to the end of the plant life

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