American Chemical Corporation Essay

Statement of the problem In October of 1979, the American Chemical Corporation (ACC) began looking for a buyer for the Collinsville, Alabama plant after successfully acquiring 91% of the shares of Universal Paper Corporation. Dixon Corporation, a specialist chemical company with customers primarily in the paper and pulp industry agreed to the possibility of purchasing the Collinsville plant for $12 million. This purchase will diversify Dixon’s product line, adding the sodium chlorate chemical, produced at the Collinsville plant, needed by its existing customers.

Dixon is evaluating different streams of cash flows for the possibility of purchasing the Collinsville plant.

Don't use plagiarized sources. Get Your Custom Essay on
American Chemical Corporation Essay
GET AN ESSAY WRITTEN FOR YOU FROM AS LOW AS $13/PAGE
Order Essay

Discussion The decision to acquire Collinsville’s plant will translate into strategic and economic benefits. Dixon could increase their supply of chemical products to their existing clients. However, first we looked in to the risk of the possible venture. Dixon has never produced sodium chlorate which could add risk to the new venture. For this reason we calculated the beta of the project based on the beta of the sodium chlorate industry.

We focused on Brunswick and Southern Chemical which are pure play sodium chlorate companies.

The average unleveraged beta obtained from the two companies is 1.035 which reflects the risk of the project. Adjusting Dixon’s beta by re-levering it using its own target capital structure of 35% ends with a beta of 1.59. The beta obtained is used to derive the CAPM method, resulting in a 21.45% cost of equity. We assumed that the debt borrowed by Dixon has a rate of 11.25% calculating an after-tax cost of debts of 5.85%. Therefore, the weighted average cost of capital (WACC) for Collinsville’s plant cash flow is nearly 16%. This ratio will be used to evaluate the different NPV’s of the projects.

To make an investment decision three scenarios have been analyzed. The first and second scenarios are to finance the plant in 5 years or 10 years respectively both with a zero salvage value at the end of the term. The Third option is to purchase the plant with a laminated technology, ACC’s technical support, and zero salvage value at the end of the term. The first two alternatives resulted in negative NPVs of ($1,928) and ($1,932) respectively, through an incremental cash flow analysis. However, acquiring Collinsville with the laminated technology will result in a positive NPV of $4,960, as well as,

reducing the electric power by 30%, and the possibility of adapting this technology to other plants to reduce operating costs.

Recommendation Based on our analysis, we recommend that Dixon Corporation invest in Collinsville with the laminate technology. Any of the other options, based on our incremental cash flow analysis, resulted in negative NPVs. We recommend investing in nothing other than the laminate technology project for the benefit of the shareholders. However, Dixon should make an acquisition agreement protecting itself in case the laminate technology fails in providing expected results. It should be stated that ACC should compensate Dixon for any installation charges. The acquisition of the plant will increase wealth to the shareholders, as well as, complement the supplying of chemical products to our existing clients.

Grand Paper Writers
Order NOW For A 10% Discount!
Pages (550 words)
Approximate price: -

Our Advantages

Plagiarism Free Papers

All papers are written by the best professional writers to ensure 100% originality. We always provide plagiarism reports whenever we deliver completed papers.

Free Revisions

All papers by Grand Paper Writers are completed and submitted on time. This timely delivery of papers gives you time to go through the paper before the official deadline.

Title-page

As an additional service, we will provide a title page that precedes the contents of your paper. Here, you will provide your personal details.

Bibliography

We also ensure that we provide an extra page for the references or bibliographies following referencing rules.

Originality & Security

At Grandpaperwriters.com, we guarantee students for the provision of security and original work. All your personal information is handled with confidentiality and is not shared with third parties. Additionally, we ensure that we provide original content with accompanying plagiarism reports to show originality.

24/7 Customer Support

Our customer support team is always available 24/7 to provide instant responses to any queries raised by students.

Try it now!

Calculate the price of your order

We'll send you the first draft for approval by at
Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

Our Services

Grandpaperwriters.com has the best professional essay writers for quality services.

Pricing

Flexible Pricing

Here, a Grandpaperwriters.com, we do not compromise on the time of our clients. We always deliver all completed papers on or before the deadlines.

Communication

Admission Help & Client-Writer Contact

Grandpaperwriters.com provides an interactive portal where students can communicate directly to their writers.

Deadlines

Paper Submission

Here, a Grandpaperwriters.com, we do not compromise on the time of our clients. We always deliver all completed papers on or before the deadlines.

Reviews

Customer Feedback

Grandpaperwriters.com appreciates feedback from our clients to help us improve the delivery of essay writing services. As such, we are constantly changing our policies to ensure maximum customer and writer satisfaction.