# Case Study of Worldwide Paper

568 Words3 Pages
Case Study of Worldwide Paper Company Introduction Bob Prescott, the controller for the Blue Ridge Mill, was considering the addition of a longwood woodyard in order to eliminate the need to purchase longwood from an outside supplier and sell short wood as a new market. However, the question appears to Prescott is that whether these expected benefits were enough to justify the \$18 million capital outlay plus the incremental investment in working capital over the six-year life of investment. Expand Situation The investment outlay of 2007 would be \$16 million and the remaining \$2 million in 2008. The operating savings comes along with the new woodyard estimated to be \$2 million for 2008 and \$3.5 million per year thereafter. The revenue of 2008 would be \$4 million, and \$10 million per year thereafter. The cost of goods sold would be 75% of revenues, and SG&amp;A would be 5% of revenues. In 2013, \$1.8 million of the capital investment would be recoverable. Taxes count as 40%. The depreciation charges start from 2008. WPC make 15% as the hurdle rate for this investment. The treasury bonds yielding 10%, whereas currently yielding is less than 5%. Financial Analysis (1) Shares outstanding: 500 million. Market value per share: \$24 So, total equity: 500 million*\$24=\$12,000 million (2) Total debt= long term debt=\$2500 million (3) Proportion of Equity: E(D+E)=\$12,000million(\$2500million+\$12,000million)=0.83 Proportion of Debt: D(D+E)=\$2500million(\$2500million+\$12,000million)=0.17 (4) Cost of Equity: CAPM: E(Ri)=Rf+βi*(Rm-Rf)= 4.6%+1.10*6%=4.6%+6.6%=11.2% (5) Rate of bank loan payable: 5.38%+1%=6.38%. Rate of long-term debt: 5.78% (6) Cost of debt: 5.78%*(1-40%)=0.03468 (7) WACC=E(D+E)*(cost of equity)+ D(D+E)*(cost of debt)=0.83*11.2%+0.17*0.03528=9.9%