Worldwide Paper Case
WORLDWIDE PAPER COMPANY
Blue Ridge Mill currently purchases shortwood from a nearby competing mill for pulp production. Bob Prescott, the controller for Blue Ridge Mill, is considering the addition of a new on-site longwood woodyard. The new woodyard would have two main benefits including the ability to eliminate the need to buy shortwood from an outside source and the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company. The new woodyard would allow Blue Ride Mill to decrease its operating costs as well as increase their revenues. We analyzed projections to see if the benefits of the new on-site longwood woodyard exceed the $18 million capital outlay plus the incremental investment in working capital over the six-year life of the investment. By looking at multiple valuation methods, we were able to make a decision of whether the new addition would be beneficial to the company in maximizing shareholder wealth or destroy shareholder wealth. We began our analysis by outlining the investment. The investment outlay would be spent over two calendar years with $16 million being spent in 2007 and $2 million in 2008. Worldwide Paper Company uses a weighted average cost of capital approach to determine the actual cost of incurring this $18 million debt. The weighted average cost of capital had previously been determined by Worldwide Paper Company to be 15%, however, this calculation was calculated using an outdated figure and was likely inaccurate for present day calculation. In order to properly calculate the cost of debt for Worldwide Paper Company, we calculated a new weighted average cost of capital using current market and company data. The formula for weighted average cost of capital, or WACC, is (% of debt on the company’s balance sheet multiplied by the after-tax cost of debt) + (% of equity on the balance sheet multiplied by cost of equity). To determine percentages of the debt and equity on
Blue Ridge Mill currently purchases shortwood from a nearby competing mill for pulp production. Bob Prescott, the controller for Blue Ridge Mill, is considering the addition of a new on-site longwood woodyard. The new woodyard would have two main benefits including the ability to eliminate the need to buy shortwood from an outside source and the opportunity to sell shortwood on the open market as a new market for Worldwide Paper Company. The new woodyard would allow Blue Ride Mill to decrease its operating costs as well as increase their revenues. We analyzed projections to see if the benefits of the new on-site longwood woodyard exceed the $18 million capital outlay plus the incremental investment in working capital over the six-year life of the investment. By looking at multiple valuation methods, we were able to make a decision of whether the new addition would be beneficial to the company in maximizing shareholder wealth or destroy shareholder wealth. We began our analysis by outlining the investment. The investment outlay would be spent over two calendar years with $16 million being spent in 2007 and $2 million in 2008. Worldwide Paper Company uses a weighted average cost of capital approach to determine the actual cost of incurring this $18 million debt. The weighted average cost of capital had previously been determined by Worldwide Paper Company to be 15%, however, this calculation was calculated using an outdated figure and was likely inaccurate for present day calculation. In order to properly calculate the cost of debt for Worldwide Paper Company, we calculated a new weighted average cost of capital using current market and company data. The formula for weighted average cost of capital, or WACC, is (% of debt on the company’s balance sheet multiplied by the after-tax cost of debt) + (% of equity on the balance sheet multiplied by cost of equity). To determine percentages of the debt and equity on