Dixon Case
Case Two Analysis
Dixon Corporation: The Collinsville Plant
Paul Candland & Lynn Chang
October 1,2013
WACC Calculation
In order to calculate WACC, we need to first start with the beta of equity. We are given the beta of equity of 1.06 of Dixon as a firm in Exhibit 7. However, the beta given is not an appropriate measure of the systematic risk of the Collinsville Plant, because Dixon produces many other chemical products other than Sodium Chlorate. Therefore, in order to accurately capture the systematic risk of the plant which only produces Sodium Chlorate, we decided to calculate the beta of equity with comparable firms’ beta. Selection of Comparable Firms: We use “Brunswick Chemical” and “Southern Chemicals” as the comps to calculate the βE ,because they are firms that only produce Sodium Chlorate that have similar capital structure as Dixon and are located in the Southeastern region. Static or Dynamic Debt: We determine that Dixon has dynamic debt to keep a relative constant D/E ratio from the data available in the financial statements of Dixon Corporation (Exhibit 7); therefore, the “tax term” is removed from our calculation of WACC. More specifically, Calculation Process:
1. Unlever Comp βE βUA(Brunswick) = (1.10)/(1+17/83) = 0.9130 βUA(Southern) = (1.20)/(1+(24.5)/(75.5)) = 0.9060
2. Average Comp βUA (0.9130+0.9060)/2 = 0.9095
3. Relever Comp βUA with project D/E The Collinsville Plant does not have any current debt, so we can value the plant as an all-equity project. The debt that Dixon incur as a firm in order to make this acquisition will affect the valuation of the firm as whole, but not the project itself. Therefore, βE= βUA
Calculate the estimated cost of equity (rE) with βE(Collinsville) = 0.9095, Risk-free rate of 9.5% (Long-term government treasury bill rate, since the project duration is longer than 1 year.), market risk premium of 5% (See attached.) rE=rf + βE (rM – rf) and now we have, rE =
Dixon Corporation: The Collinsville Plant
Paul Candland & Lynn Chang
October 1,2013
WACC Calculation
In order to calculate WACC, we need to first start with the beta of equity. We are given the beta of equity of 1.06 of Dixon as a firm in Exhibit 7. However, the beta given is not an appropriate measure of the systematic risk of the Collinsville Plant, because Dixon produces many other chemical products other than Sodium Chlorate. Therefore, in order to accurately capture the systematic risk of the plant which only produces Sodium Chlorate, we decided to calculate the beta of equity with comparable firms’ beta. Selection of Comparable Firms: We use “Brunswick Chemical” and “Southern Chemicals” as the comps to calculate the βE ,because they are firms that only produce Sodium Chlorate that have similar capital structure as Dixon and are located in the Southeastern region. Static or Dynamic Debt: We determine that Dixon has dynamic debt to keep a relative constant D/E ratio from the data available in the financial statements of Dixon Corporation (Exhibit 7); therefore, the “tax term” is removed from our calculation of WACC. More specifically, Calculation Process:
1. Unlever Comp βE βUA(Brunswick) = (1.10)/(1+17/83) = 0.9130 βUA(Southern) = (1.20)/(1+(24.5)/(75.5)) = 0.9060
2. Average Comp βUA (0.9130+0.9060)/2 = 0.9095
3. Relever Comp βUA with project D/E The Collinsville Plant does not have any current debt, so we can value the plant as an all-equity project. The debt that Dixon incur as a firm in order to make this acquisition will affect the valuation of the firm as whole, but not the project itself. Therefore, βE= βUA
Calculate the estimated cost of equity (rE) with βE(Collinsville) = 0.9095, Risk-free rate of 9.5% (Long-term government treasury bill rate, since the project duration is longer than 1 year.), market risk premium of 5% (See attached.) rE=rf + βE (rM – rf) and now we have, rE =