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
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Valuation 7. a. 12%‚ of course. b. rE = .12 + (.12 - .075)(30/70) = .139‚ WACC = .075(1 - .35)(.30) + .139(.70) = .112‚ or 11.2%. 8. a. Base-case NPV = -1‚000 + 1200/1.20 = 0 b. PV tax shield = (.35 X .1 X .3(1000))/1.1 = 9.55. APV = 0 + 9.55 = $9.55 17.
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GOLDMAN SACHS RECOMMENDED READING LIST Written by Current or Former Goldman Sachs Employees • The Five Great Myths About China and The World by Jonathan Anderson and Fred Hu; PPP Company • Exploring General Equilibrium by Fischer Black; MIT Press; 1995 • Business Cycles and Equilibrium by Fischer Black; Blackwell Publishers; 1991 • Managing Currency Risk by Fischer Black; Association for Investment Management & Research; 1989 • Old Girls’ Network: Insider Advice for Women Building Businesses
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KRAFT FOOD INCORPORATION Marketing Plan Table of Contents 1. Executive Summary Page 3 2. Company Description 4 3. Strategic Focus and Plan 5 Mission 6 Vision
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Ratio 5. APV determined using the unlevered equity discount rate and the debt rate. Interest tax shield considered accordingly 6. Steps 1-5 repeated for firm with synergy and value determined. Key Issues that have been faced are the following a. Valuations of Cash flows 1. Determining the correct discount rate. 2. Accepting that all receivables will be converted to cash in the future 3. D/V Ratio taken at industry average 4. Free cash flows computed for 5 years 5. Interest tax shield (APV) discounted
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(E/V) = (0.08 0.378) + (0.15 0.622) = 0.1235 Step 2: rE = r + (r – rD) (D/E) = 0.1235 + (0.1235 – 0.08) 0.403 = 0.1410 Step 3: WACC = [rD (1 – TC) (D/V)] + [rE (E/V)] = (0.08 0.65 0.287) + (0.1410 0.713) = 0.1155 = 11.55% 17. APV – Consider another perpetual project like the
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Project vs Firm Risk and the Impact of Leverage The SML and WACC § Consider 100% equity financed firm § Beta = 1 E/V = 1! D/V = 0! § WACC =? E D WACC = × RE + × RD × (1 − TC ) = RE V V WACC = Cost of equity from CAPM [ ] WACC = RE = R f + β × E [RM ] − R f = E [RM ] Beta =1! 2 SML and WACC SML Expected Return WACC = E[RM] Rf [ R f + β × E [RM ] − R f ] β=1 Beta 3 Accept Projects Y and/or Z? Expected Return IRRz WACC = E[RM]
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Kentucky Fried Chicken and the Global Fast-Food Industry: KFC : world’s largest chicken restaurant chain and third largest fast-food chain in 2004 One of the first fast-food chains to go international‚ one of the world’s most recognizable brands. KFC’s early international strategy: grow its company and franchise restaurant base throughout the world refocused in 2004 on several high growth markets (China‚ Canada‚ UK‚ Australia‚ South Africa‚ and more) company-owned restaurants (greater control
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option. Therefore‚ we evaluated the expected value of the second-generation project by using Black-Scholes. If Penelope wanted to justify investing in the first-generation project by investing in the second-generation project‚ they would need the total APV equal or greater than zero‚ which means the sum of NPV of the first-generation project (- $3‚370‚071) and value of the call option to make the follow-on investment should be equal or greater than zero. The cost of second-generation project of $100 million
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of different inflation rates needs to be understood in this project and the different interest rates for financing. So when looking at this type of financing it is better to use the APV compared with the NPV‚ as it looks at individual cash flows and adjust them according. As you can see below a traditional NPV and APV with debt financing was calculated. It would be more beneficial for Dorchester to finance this project partly through debt as they could realize some tax savings. These figures were
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