American Chemical Final
Applied Corporate Finance
Case: American Chemical Corporation
The primary issue we are exploring here is the planned sale of the Collinsville Plant by American
Chemical Corporation to Dixon at a negotiated price of $ 12 Million (as of end of year ‘79)
Q1: Estimate the appropriate cost of capital for the investment
To calculate the appropriate cost of capital we assessed Dixon’s purchase investment structure. The steps were as follows:
1. We first calculated the cost of debt of the investment using $8 Million in 15 year bonds and $
4 Million through a note. The yield rate for the loan was taken at 11.25% as this was the effective rate of interest paid.
2. In order to calculate cost of debt for the $8m in bonds (effective yield required by bond investors), we took the following steps:
a. We calculated the interest coverage, which was 99x before the start of the project for
Dixon but would rapidly come down to single digit (6.5 – 9.3x) after the investment
(this also implies there can be some legitimate concerns about Dixon’s future debt servicing plans)
b. We compared interest cover and debt-to-capital ratios of Dixon after the project with the relevant industry competitors for the project (all sodium chloride producers). We felt that these were the most relevant references for the project. This resulted in an implied rating for Dixon after the project of AA.
c. We then used the expected yield of 10.25% for AA-rated debt
3. We then calculated overall cost of debt based on weightings of 1/3 loan and 2/3 bonds, to get a figure of
4. Debt-to-Capital ratio as given in the case, post investment would become 47% and Debt-toEquity ratio at 89% which was above their targeted D/C at 35%.
5. For the Cost of Equity we first calculated the Market Unlevered and Levered Beta. For this we looked at each of the industry player in Exhibit 5, unlevered their Betas to reach an average figure of 0.8833 Unlevered Industry Beta.
6. We re-levered the average Industry Beta with Dixon’s
Case: American Chemical Corporation
The primary issue we are exploring here is the planned sale of the Collinsville Plant by American
Chemical Corporation to Dixon at a negotiated price of $ 12 Million (as of end of year ‘79)
Q1: Estimate the appropriate cost of capital for the investment
To calculate the appropriate cost of capital we assessed Dixon’s purchase investment structure. The steps were as follows:
1. We first calculated the cost of debt of the investment using $8 Million in 15 year bonds and $
4 Million through a note. The yield rate for the loan was taken at 11.25% as this was the effective rate of interest paid.
2. In order to calculate cost of debt for the $8m in bonds (effective yield required by bond investors), we took the following steps:
a. We calculated the interest coverage, which was 99x before the start of the project for
Dixon but would rapidly come down to single digit (6.5 – 9.3x) after the investment
(this also implies there can be some legitimate concerns about Dixon’s future debt servicing plans)
b. We compared interest cover and debt-to-capital ratios of Dixon after the project with the relevant industry competitors for the project (all sodium chloride producers). We felt that these were the most relevant references for the project. This resulted in an implied rating for Dixon after the project of AA.
c. We then used the expected yield of 10.25% for AA-rated debt
3. We then calculated overall cost of debt based on weightings of 1/3 loan and 2/3 bonds, to get a figure of
4. Debt-to-Capital ratio as given in the case, post investment would become 47% and Debt-toEquity ratio at 89% which was above their targeted D/C at 35%.
5. For the Cost of Equity we first calculated the Market Unlevered and Levered Beta. For this we looked at each of the industry player in Exhibit 5, unlevered their Betas to reach an average figure of 0.8833 Unlevered Industry Beta.
6. We re-levered the average Industry Beta with Dixon’s