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American Chemical Corporation Case

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American Chemical Case

The American Chemical Corporation wanted to buy any and all shares of the Universal Paper Corporation because of their combined efforts in the production of sodium chlorate. To do so without violating the Clayton Act, American agreed to sell their Collinsville production plant to Dixon Corporation. Dixon wants to buy the Collinsville plant to help diversify its specialty chemical product line. This plant initially cost 12 million dollars with an additional 2.25 million dollars needed to buy laminate technology to increase efficiency and profitability of the plant in order. Cash flow analysis with and without the laminate technology will show whether or not Dixon should go further with purchasing the plant. The cost of equity can be calculated as follows. In the case, the yield on Treasury bonds is 9.5%, which is assumed to be the risk free rate. Using a historical equity risk premium 8.4%, the CAPM method says the cost of equity for this project is 9.5%+1.38*8.4% = 21.26%. Since little information about Dixon’s debt is provided in the case, I assumed that all debt Dixon intends to borrow is used in the acquisition of Collinsville plant at 11.25%. We also assume that debt is issued at par. The after-tax cost of debt is (1-0.48)*11.25% = 5.85%. Dixon’s target level of debt-to-asset ratio is 35%, which is used to find the cost of capital: WACC = D/V*After-tax cost of debt + E/V*Cost of equity = 0.35*5.85%+0.65*21.26% = 15.87%. Calculating NPV without laminate technology is done by using the basis of the information provided in the appendixes in the case. Using the data in Exhibit 8 and projected cash flow from 1980 to 1984, I calculated the NPV to be negative. With laminate technology, I incorporated some cost reductions and benefits mentioned in the case. Therefore, my new NPV with the laminate technology=NPV without laminate + NPV additional savings. This results in a positive NPV. Besides increasing shareholders wealth, other economic benefits for Dixon include an increase in product range, a larger market share in paper industry, an opportunity to enter a new market, and competition reduction. Also these new expansions allow for growth of the current relationships with existing customers. By using the laminate technology, the company can considerably cut power cost and eliminate graphite costs. In addition, by becoming technologically savvy, the company can reduce production costs. In conclusion, my recommendation is for Dixon to invest in the Collinsville plant under the circumstances that it uses the Laminate technology. A firm most importantly is operating in the interest of its shareholders. Buying the plant alone without the technology does not do this and has a negative NPV. Buying the plant with the new technology has a positive NPV and increases the wealth of shareholders as well as increases the scale and scope of the Dixon company.

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