Case Study of Worldwide Paper

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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&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%

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