(1) What (if any) are the problems confronting the company?
Dixon Corporation planned to buy Collinsville plant from American Chemical Corporation for $12 million and another $2.25 million of installation cost of laminated electrodes. The problem is if Dixon should purchase the Collinsville plant with the laminated electrodes program based on the pro forma financial statements they conducted. (2) How did the problems arise?
When American Chemical Corporation tried to buy the Universal Paper Corporation, Universal’s management sued that American’s acquisition of Universal would violate the antitrust laws. At the end, American agreed to divest its sodium chlorate plant located near Collinsville, Alabama. After the acquisition, Dixon Corporation agreed to buy the Collinsville plant because it fitted well with Dixon’s strategy of supplying chemicals to the paper and pulp industry. Sodium chlorate would complement Dixon’s existing product lines. But the development and application of the new technology of laminated electrodes generates much uncertainty on the costs and the future returns. In addition, the $12 million would be financed by debt capital, which would generate interest costs and increase the debt ratio over the targeted one. (3) Does the management adequately understand the problems and their causes?
Yes. The management already generated pro forma financial statements for the Collinsville plant and the cost of the acquisitions. (4) What (if any) solutions to the problems is the management considering?
In evaluating the plant’s purchase, Dixon prepared the pro forma financial statements without considering the operating economies that might be realized from installing laminated electrodes. Industry overcapacity was expected to push margins down in the short run, while the price of sodium chlorate will increase on average at 8% per year and power costs were projected to increase at 12% per year. Selling expenses could be reduced and the depreciation charge could be increase. (5) How good are those solutions?
The Dixon failed to consider the operating economies that could be realized from laminated electrodes, which is a significant factor that will influence the future cash flow. (6) What would you do?
All the detailed calculation is in the Table at the end of the report.
I would calculate NPV of the acquisition to decide if this purchase has any value to increase the shareholder’s interest.
First, I would calculate the cost of debt by using the tax rate and interest rate from Exhibit 6.

Second, I would calculate the cost of equity. The β of the project should be similar to β of the sodium chlorate producers with similar size to Collinsville Plant. Brunswick Chemical and Southern Chemicals had comparable volume of sales with Collinsville plant, so I use the average β of those two firms as Dixon’s asset beta. Next, I convert asset beta to equity beta assuming the debt ratio of 35%, the target ratio in the long run.

Third, I calculate the WACC as the discount rate for later NPV’s calculation.