Collinsville Plant Acquisition Analysis

This assignment presents a detailed analysis of the potential acquisition of the Collinsville Plant by Dixon Enterprises. It includes calculations of key financial metrics such as net working capital, depreciation, projected FCF, terminal value, and discounted cash flow. The report culminates in a Net Present Value (NPV) calculation and a conclusion recommending whether or not Dixon should acquire the plant based on its financial projections.

Corporate Finance

Table of Contents
INTRODUCTION...........................................................................................................................3
MAIN BODY..................................................................................................................................3
1. Estimating the average cost of capital for discounting Collinsville plant’s incremental cash
flows............................................................................................................................................3
TASK 2&3.......................................................................................................................................4
Projection of Incremental cash flows and net present value for Collinsville Plant.....................4
CONCLUSION................................................................................................................................6
REFERENCES................................................................................................................................7

INTRODUCTION
Field of corporate finance is highly concerned with the development of highly suitable
and optimal capital structure. The rationale behind this, both such elements have high level of
impact on the financial position and performance of the organization. This project report is based
on the case situation of Dixon Corporation which will provide deeper insight about the aspect
that firm need to invest in the plant or not in accordance with WACC, CAPM and NPV method.
MAIN BODY
1. Estimating the average cost of capital for discounting Collinsville plant’s incremental cash
flows
In this, Pennwalt and Kerr-Mc Gee are the major producers of Sodium Chlorate. Hence,
by making assessment of average rate of debt and capital Dixon Corporation can identify the
level of risk in the best possible way (Kumar and Mishra, 2016). The rationale behind the
selection of Pennwalt and Kerr-Mc Gee is that they are the leading firms who produce sodium
Chlorate. This in turn helps Dixon in developing highly competent and strategic framework for
the near future.
Calculation of project beta and CAPM
Book
Debt/Capital
Equity/
Capital Beta(e) Beta(d) Beta(a)
Pennwalt 32% 68% 1.33 0 0.90
Kerr -Mc Gee 20% 80% 1.06 0 0.85
Average 26% 74% 0.88
Project Beta 1.18
CAPM 17.79%
Computation of tax rate
Particulars 1978 (in $) 1977 (in $) 1976 (in $) 1975 (in $)

Taxable Income 6330 4741 3925 2366
Taxes Paid 2,932 2,285 1,878 1,125
Tax Rate 46% 48% 48% 48%
WACC 14.69%
From the above mentioned tabular presentation, it has been assessed that project beta is
1.18 which is very high. It entails that high risk level which is associated with the financial
aspects of Collinsville plant. Along with this, WACC of such project is 14.69%. Thus, on the
basis of such aspect cash flows will be discounted by Dixon Corporation. Hence, in this, data in
relation to debt and equity has taken from 1974 to 1978. Along with this, beta has been taken
which is cited in financial statements such as 1.33 & 1.06. Thus, by taking into consideration the
overall aspects and performance it can be stated that investment in relation to plan is risky.
Hence, business unit is required to deal with such aspect through the means of strategic planning
or framework.
TASK 2&3
Projection of Incremental cash flows and net present value for Collinsville Plant
In the present report there is a Dixon firm which is going to acquire Collinsville Plant and
for that it requires to know its future value. When the firm able to know future value that it can
easily determine that in the upcoming year acquisition will be profitable for it or not
(Vernimmen and et.al., 2014). On the basis of weighted average cost of capital projection of
future value of targeting firm is given as below:
Year 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989
EBIT 833 2218 3035 3134 3026 3026 3026 3026 3026 3026
Tax @ 30% 249.9 665.4 910.5 940.2 907.8 907.8 907.8 907.8 907.8 907.8
EBIT (1-t) 583.1 1552.6 2124.5 2193.8 2118.2 2118.2 2118.2 2118.2 2118.2 2118.2

Depreciation 1200 1200 1200 1200 1200 1200 1200 1200 1200 1200
CAPEX
(capital
expenditure) 12600 600 600 600 600 600 600 600 600 600
Account
receivables 1328 1680 1976 2136 2303
Inventories 598 756 889 961 1036
Account
payables 730 924 1087 1175 1267
NWC (net
working
capital) 1196 1512 1778 1922 2072
2237.7
6
2416.7
8
2610.1
2
2818.9
3
3044.4
5
Change in
NWC 1196 -316 -266 -144 -150
-
165.76
-
179.02
-
193.34
-
208.81
-
225.51
FCF
-
12012.
9 2468.6 2990.5 2937.8 2868.2
2883.9
6
2897.2
2
2911.5
4
2927.0
1
2943.7
1
Terminal
value 0 0 0 0 0 0 0 0 0 0
Discount
rate 0.87 0.76 0.66 0.58 0.50 0.44 0.38 0.33 0.29 0.25
Present
value
-
10474.
23
1876.7
2
1982.2
9
1697.9
3
1445.3
8
1267.1
7
1109.9
5 972.57 852.50 747.55
Net present value = $1477.82

Interpretation
From the above mentioned table it can be interpreted that net working capital (NWC) is
consistently enhances up to the financial year 1989. According to the straight line depreciation
method amount of depreciation is same in all the years that is $1200. It can be visualized that
projected net present value (NPV) of the Collinsville Plant at the end of accounting period 1989
is worth of $1477.82 which is positive and better. When NPV is positive then it profitable for the
management as well as it is the most reliable method to chose or acquire project in the firm
(Incremental Cash Flows, 2015).
CONCLUSION
From the above report, it has been concluded that the Dixon should acquire business
enterprise Collinsville Plant which helps to generate profit in the future. Moreover, it can be said
that when Dixon entity acquire targeting company then synergy gain will be enhance in the
upcoming financial years.

REFERENCES
Kumar, D. and Mishra, K.K., 2016. Corporate Finance & Investments: Corporate Finance Issues
Prevailing In India at Present. International Research Journal of Management, IT & Social
Sciences. 3(1). pp.34-43.
Vernimmen, P. and et.al., 2014. Corporate Finance: Theory and Practice. John Wiley & Sons.
Online
Incremental Cash Flows, 2015. [Online]. Available through:
<http://www.accaglobal.com/in/en/student/exam-support-resources/foundation-level-
study-resources/ffm/ffm-technical-articles/incremental.html> [Accessed on 28th February
2017].