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Culture Documents
69%
Cost of Capital 14.06%
Growth Rate 8.00%
Debt 12,000
Bond Rate 10.75%
Risk Free Rate 9.50%
PV of Tax Shield 3,943
NPV 13,888
Scenario 2: Graphite Laminate Technology, Terminal Value Based on 8% Growth for 5 Years
Debt 12,000
Bond Rate 10.75%
Risk Free Rate 9.50%
PV of Tax Shield 3,943
NPV 19,352
1983 1984 TV
4 5 5
21,356 23,028
16,317 17,973
5,039 5,055
152 168
543 591
4,344 4,296
1,210 1,270
3,134 3,026
1,210 1,270
144 150
600 600
1,526 1,473
2,074 2,073 8,170
0.591 0.518 0.518
1,225 1,074 4,232
1983 1984 TV
4 5 5
21,356 23,028
14,475 15,912
6,881 7,117
152 168
543 591
6,186 6,358
1,435 1,495
4,751 4,863
1,435 1,495
144 150
600 600
2,313 2,368
3,129 3,240 12,772
0.591 0.518 0.518
1,849 1,678 6,616
Exhibit 8
EXHIBIT 8 Pro Forma Financial Statements for the Collinsville Plant (a) (000s)
MANUFACTURING COSTS
VARIABLE
Power $6,304 $7,735 $9,386 $10,526 $11,780
Graphite 645 791 875 940 992
Salt & other 1,285 1,621 1,753 1,836 1,956
Total variable $8,234 $10,147 $12,014 $13,302 $14,728
FIXED
Labor $1,180 $1,297 $1,427 $1,580 $1,738
Maintenance 256 277 299 322 354
Other 1,154 1,148 1,179 1,113 1,153
Total fixed $2,590 $2,722 $2,905 $3,015 $3,245
OTHER CHARGES
Selling $112 $125 $138 $152 $168
R&D 451 478 508 543 591
Depreciation $1,060 $1,110 $1,160 $1,210 $1,270
TOTAL $1,623 $1,713 $1,806 $1,905 $2,029
Page 5
Exhibit 8
EXHIBIT 8
(cont.)
Expected
December
31 For years ended December 31
1979 1980 1981 1982 1983 1984
ASSETS
Accts. receivable $1,622 $1,328 $1,680 $1,976 $2,136 $2,303
Inventories 651 598 756 889 961 1,036
Net property,
plant & equipmen 10,600 10,025 9,440 8,840 8,230 7,560
LIABILITIES
Accts. payable 873 730 924 1,087 1,175 1,267
Operating profit/
net assets 7.4% 20.3% 28.6% 30.9% 31.4%
Page 6
Exhibit 8
(a) These pro forma financial statements were based on the following assumptions:
(1) Continued use of unlaminated graphite electrodes.
(2) Though excess industry capacity would hold price increases to less than an 8% annual rate in 1980, by
1984 the average annual price increase over the period 1979-1984 was assumed to equal 8%.
(3) Power costs per KWH would increase 12% per year.
(4) Depreciation would increase because Dixon would have written-up the value of the Collinsville plant
to $10.6 million.
Debt 7,442
Interest "A" 10.75%
Amount 800
Page 7
Exhibit 8
MANUFACTURING COSTS
VARIABLE
Power 5,201 6,381 7,743 8,684
Graphite 645 791 875 940
Salt & other 1,285 1,621 1,753 1,836
Total variable $7,131 $8,793 $10,371 $11,460
FIXED
Labor $1,180 $1,297 $1,427 $1,580
Maintenance 256 277 299 322
Other 1,154 1,148 1,179 1,113
Total fixed $2,590 $2,722 $2,905 $3,015
OTHER CHARGES
Selling $112 $125 $138 $152
R&D 451 478 508 543
Depreciation $1,285 $1,335 $1,385 $1,435
TOTAL $1,848 $1,938 $2,031 $2,130
Page 8
Exhibit 8
EXHIBIT 8
(cont.)
Expected
December
31 For years ended December 31
1979 1980 1981 1982 1983
ASSETS
Accts. receiva $1,622 $1,328 $1,680 $1,976 $2,136
Inventories 651 598 756 889 961
Net property,
plant & equip 10,600 10,025 9,440 8,840 8,230
LIABILITIES
Accts. payable 873 730 924 1,087 1,175
Operating profit/
net assets 7.4% 20.3% 28.6% 30.9%
Page 9
Exhibit 8
Page 10
Exhibit 8
er 31
1984
38,000
$606
$23,028
9,719
992
1,956
$12,667
$1,738
354
1,153
$3,245
$15,912
$168
591
$1,495
$2,254
$4,863
Page 11
Exhibit 8
2,368
4,863
(2,368)
(538)
1,495
(150)
3,302
ber 31
1984
$2,303
1,036
7,560
$10,899
1,267
$9,632
$2,072
($150)
1984
51.2%
64.0%
14.1%
78.0%
13.1%
10.0%
4.5%
5.5%
41.8%
31.4%
Page 12
EARNINGS MULTIPLES METHOD:
Assumptions:
(a) Expected (Exhibit 6)
(b) Average Closing P/E of selected sodium chlorate producers
(c) Price based on last 2 years' multiples average
DCF METHOD:
PENNWALT
Debt 104 150 155
Market Value of Equity 162 284 326
D/EV 0.39 0.35 0.32
KERR-MCGEE
Debt 162 218 318
Market Value of Equity 1798 1782 1755
D/EV 0.08 0.11 0.15
GEORGIA-PACIFIC
Debt 871 903 450
Market Value of Equity 1410 2501 3741
D/EV 0.38 0.27 0.11
BRUNSWICK CHEMICAL
Debt 0.59 0.57 0.53
Market Value of Equity
D/EV
SOUTHERN CHEMICALS
Debt 0.80 0.75 0.74
Market Value of Equity
D/EV
9.2 7.3
10.2 10.5
6.7 5.3
11.0 8.2
8.5 7.3
6.7 6.4
8.7 7.5 7.5
301 261
1214 1239
0.20 0.17 0.14
390 372
724 636
0.35 0.37 0.32
737 835
2882 2476
0.20 0.25 0.24
0.49 0.48
6.04 5.77
0.08 0.08 0.08
0.67 0.63
4.96 4.67
0.12 0.12 0.12
d a
0 0.88
0 0.91
0 0.55
0 1.14
0 0.92
0 1.06
0.91
nded December 31 TV at
1983 1984 14.32% growth = 8%
4 5 5
3,134 3,026
(1,066) (1,029)
(538) (538)
1,210 1,270
(144) (150)
2,597 2,580 17,437 41008
0.58 0.50 0.50 3887832
1,496 1,294 8,748
nded December 31 TV at
1983 1984 14.32%
4 5 5
4,751 4,863
(1,615) (1,653)
(538) (538)
1,435 1,495
(144) (150)
3,889 4,017 27,151
0.58 0.50 0.50
2,240 2,015 13,621
EARNINGS MULTIPLES METHOD:
Assumptions:
(a) Expected (Exhibit 6)
(b) Average Closing P/E of selected sodium chlorate producers
(c) Price based on last 2 years' multiples average
DCF METHOD:
PENNWALT
Debt 104 150 155
Market Value of Equity 162 284 326
D/EV 0.39 0.35 0.32
KERR-MCGEE
Debt 162 218 318
Market Value of Equity 1798 1782 1755
D/EV 0.08 0.11 0.15
GEORGIA-PACIFIC
Debt 871 903 450
Market Value of Equity 1410 2501 3741
D/EV 0.38 0.27 0.11
BRUNSWICK CHEMICAL
Debt 0.59 0.57 0.53
Market Value of Equity
D/EV
SOUTHERN CHEMICALS
Debt 0.80 0.75 0.74
Market Value of Equity
D/EV
9.2 7.3
10.2 10.5
6.7 5.3
11.0 8.2
8.5 7.3
6.7 6.4
8.7 7.5 7.5
301 261
1214 1239
0.20 0.17 0.14
390 372
724 636
0.35 0.37 0.32
737 835
2882 2476
0.20 0.25 0.24
0.49 0.48
6.04 5.77
0.08 0.08 0.08
0.67 0.63
4.96 4.67
0.12 0.12 0.12
d a
0 0.88
0 0.91
0 0.55
0 1.14
0 0.92
0 1.06
0.91
nded December 31 TV at
1983 1984 14.32% growth = 8%
4 5 5
3,134 3,026
(1,066) (1,029)
(538) (538)
1,210 1,270
(144) (150)
2,597 2,580 17,437 41008
0.58 0.50 0.50 3887832
1,496 1,294 8,748
nded December 31 TV at
1983 1984 14.32%
4 5 5
4,751 4,863
(1,615) (1,653)
(538) (538)
1,435 1,495
(144) (150)
3,889 4,017 27,151
0.58 0.50 0.50
2,240 2,015 13,621
Copyright
This case was prepared as the basis for class discussion rather than to illustrate either
effective or ineffective handling of an administrative situation. It is a rewritten version
of an earlier case entitled, "American Chemical Corporation," HBS no. 280-102.
Page 25
Exhibit 1
Page 26
Exhibit 1
Page 27
Exhibit 1
(a) Equal to earnings before interest and taxes divided by interest expenses.
(b) Standard & Poor's rating/Moody's rating.
Page 28
Exhibit 1
1978
$5,490
349
$8.20
$1.80
4.1%
$48
32
44
5.4
2,527
39%
20%
41%
1.20
6.7
BBB/A
1978
$3,268
120
$4.25
$2.00
7.1%
$45
28
28
6.6
2,467
38%
0%
62%
1.43
4.9
A/A
Page 29
Exhibit 1
1978
$6,888
575
$3.16
$1.30
5.6%
$31
22
25
7.9
6,793
43%
0%
57%
1.25
4.4
A/Aa
1978
$10,584
787
$5.39
$2.42
5.8%
$46
33
42
7.8
6,394
17%
4%
79%
1.22
9.5
AAA/Aaa
Page 30
Exhibit 1
1978
$5,019
303
$8.29
$3.18
6.8%
$60
44
47
5.7
4,115
30%
0%
70%
1.43
6.5
AA/Aa
1978
$7,870
394
$6.09
$2.80
8.2%
$43
34
34
5.6
5,997
28%
0%
72%
1.05
4.9
A/Aa
Page 31
Exhibit 2
Page 32
Exhibit 2
Page 33
Exhibit 2
(a) Equal to earnings before interest and taxes divided by interest expenses.
(b) Standard & Poor's rating/Moody's rating.
Page 34
Exhibit 2
nd Other Selected
1978
$2,525
191
$4.61
$1.00
3.6%
$38
26
28
6.0
2,018
33%
0%
67%
1.52
8.2
A/Aa
1978
$2,467
112
$4.39
$1.90
6.2%
$38
29
31
7.1
1,647
34%
1%
65%
1.03
4.7
A/A
Page 35
Exhibit 2
1978
$4,150
234
$4.94
$2.00
5.5%
$49
35
37
7.5
3,407
28%
0%
72%
1.43
5.3
AA/Aa
1978
$2,322
121
$5.12
$1.21
6.8%
$34
17
23
4.5
1,171
36%
1%
63%
2.16
5.3
A/A
Page 36
Exhibit 2
1978
$1,911
149
$6.36
$2.60
6.4%
$50
39
41
6.4
1,435
19%
0%
81%
0.99
10.5
AA/Aa
1978
$2,300
127
$3.94
$1.74
6.4%
$35
26
28
7.1
1,791
30%
0%
70%
1.14
5.9
NR/NR
Page 37
Exhibit 5
Page 38
Exhibit 5
Page 39
Exhibit 5
(a) Equal to earnings before interest and taxes divided by interest expenses.
(b) Standard & Poor's rating/Moody's rating.
(c) Stock not publicly traded.
Page 40
Exhibit 5
orate Producers
1978
$921
45
$4.54
$2.05
6.7%
$43
32
33
7.3
524
162
0
361.56
9.91
328.50
1.33
4.2
A/A
1978
$2,072
118
$4.57
$1.25
2.6%
$53
40
48
10.5
1,533
261
0
1272.39
25.82
1239.00
Page 41
Exhibit 5
1.06
6.4
AA/Aa
1978
$1,364
120
$6.61
$2.60
7.4%
$44
34
35
5.3
1161.00
371.52
11.61
777.87
18.15
636.00
0.81
6.3
NR/A
1978
$4,403
302
$2.93
$1.03
4.5%
$33
24
24
8.2
2878.00
834.62
0.00
2043.38
103.07
2476.40
1.50
9.3
AA/Aa
Page 42
Exhibit 5
1978
$4.3
0.79
$1.58
$0.40
3.5%
14.25
9
11.50
7.3
3.20
0.48
0.00
2.72
0.50
5.77
1.10
53.0
N/R
1978
$3.9
0.73
$3.66
$0.30
1.3%
31
20
23
6.4
3.00
0.63
0.00
2.37
0.20
4.67
1.2
24.0
N/R
Page 43
Exhibit 6
MANUFACTURING COSTS
VARIABLE
Power $2,935 $3,395 $4,631 $5,530 $6,173
Graphite 354 369 545 653 689
Salt & other 693 800 1,047 1,274 1,307
Total variable $3,982 $4,564 $6,223 $7,457 $8,169
FIXED
Labor $590 $608 $646 $739 $924
Maintenance 143 201 220 272 235
Other 474 659 902 1,063 509
Total fixed $1,207 $1,468 $1,768 $2,074 $1,668
Total Manufacturing
costs $5,189 $6,032 $7,991 $9,531 $9,837
OTHER CHARGES
Depreciation $433 $394 $402 $391 $384
Selling 114 92 126 155 181
R&D 105 154 207 274 351
Total $652 $640 $735 $820 $916
(a) Expected
Page 44
Exhibit 6
EXHIBIT 6
(cont.)
For years ended December 31
1974 1975 1976 1977 1978
ASSETS
Accounts receivable $701 $779 $1,128 $1,456 $1,575
Inventories 254 544 681 647 639
Net property, plant
& equipment 4,066 3,978 4,003 3,853 3,964
Total $5,021 $5,301 $5,812 $5,956 $6,178
LIABILITIES
Accounts payable 402 472 619 780 795
Operating profit/
net assets 23.7% 16.9% 44.8% 84.2% 90.0%
(a) Expected
Page 45
Exhibit 6
1979 (a)
38,507
$413
$15,903
$6,759
714
1,385
$8,858
$1,072
237
1,107
$2,416
$11,274
$399
204
429
$1,032
$3,597
Page 46
Exhibit 6
1979 (a)
$1,622
651
4,014
$6,287
873
$5,414
1979 (a)
42.5%
55.7%
15.2%
70.9%
22.6%
10.2%
4.1%
5.5%
34.0%
66.4%
Page 47
Exhibit 7
(a) Expected.
(b) 1979 value as of 10/30/79
EBIT
Page 48
Exhibit 7
ber 31
1979 (a)
$42,259
29,185
4,436
716
80
3,818
$4,024
$3.66
$0.50
$4,824
8,029
8,918
$21,771
$6,053
1,000
14,718
$21,771
$3545
$40 (b)
1979 (a)
43,978
1,000
42,978
0.02
Page 49