Year 1979 1980 1981 1982 1983 1984 Period 0 1 2 3 4 5
Year 1979 1980 1981 1982 1983 1984 Period 0 1 2 3 4 5
Year 1979 1980 1981 1982 1983 1984 Period 0 1 2 3 4 5
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
TV
5
8,170
0.518
4,232
TV
5
12,772
0.518
6,616
Exhibit 8
EXHIBIT 8 Pro Forma Financial Statements for the Collinsville Plant (a) (000s)
Option 1 - with unlaminated graphite electrodes: Option 2 - with laminated graphite electrodes:
VARIABLE VARIABLE
Power $6,304 $7,735 $9,386 $10,526 $11,780 Power
Graphite 645 791 875 940 992 Graphite
Salt & other 1,285 1,621 1,753 1,836 1,956 Salt & other
Total variable $8,234 $10,147 $12,014 $13,302 $14,728 Total variable
FIXED FIXED
Labor $1,180 $1,297 $1,427 $1,580 $1,738 Labor
Maintenance 256 277 299 322 354 Maintenance
Other 1,154 1,148 1,179 1,113 1,153 Other
Total fixed $2,590 $2,722 $2,905 $3,015 $3,245 Total fixed
Total Manufacturing Costs $10,824 $12,869 $14,919 $16,317 $17,973 Total Manufacturing Costs
Page 5
Exhibit 8
EXHIBIT 8 EXHIBIT 8
(cont.) (cont.)
Expected
Expected December
December 31 For years ended December 31 31
1979 1980 1981 1982 1983 1984 1979
ASSETS ASSETS
Accts. receivable $1,622 $1,328 $1,680 $1,976 $2,136 $2,303 Accts. receiva $1,622
Inventories 651 598 756 889 961 1,036 Inventories 651
Net property, Net property,
plant & equipmen 10,600 10,025 9,440 8,840 8,230 7,560 plant & equip 10,600
LIABILITIES LIABILITIES
Accts. payable 873 730 924 1,087 1,175 1,267 Accts. payable 873
NET ASSETS $12,000 $11,221 $10,952 $10,618 $10,152 $9,632 NET ASSET $12,000
(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 $10.6 million.
Page 6
Exhibit 8
Debt 7,442
Interest "A" 10.75%
Amount 800
Page 7
Exhibit 8
CTURING COSTS
Page 8
Exhibit 8
Page 9
EARNINGS MULTIPLES METHOD:
OPER. PROFIT (Exhibit 6) ($ thousand): 1,096 817 2,326 4,357 4,845 3,597
Tax @ 48.7% 534 398 1,133 2,122 2,359 1,752
Net Income 562 419 1,193 2,235 2,485 1,845
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 Average
Debt 104 150 155 170 162
Market Value of Equity 162 284 326 386 329
D/EV 0.39 0.35 0.32 0.31 0.33 0.34
KERR-MCGEE
Debt 162 218 318 301 261
Market Value of Equity 1798 1782 1755 1214 1239
D/EV 0.08 0.11 0.15 0.20 0.17 0.14
GEORGIA-PACIFIC
Debt 871 903 450 737 835
Market Value of Equity 1410 2501 3741 2882 2476
D/EV 0.38 0.27 0.11 0.20 0.25 0.24
BRUNSWICK CHEMICAL
Debt 0.59 0.57 0.53 0.49 0.48
Market Value of Equity 6.04 5.77
D/EV 0.08 0.08 0.08
SOUTHERN CHEMICALS
Debt 0.80 0.75 0.74 0.67 0.63
Market Value of Equity 4.96 4.67
D/EV 0.12 0.12 0.12
41008
3887832
EARNINGS MULTIPLES METHOD:
OPER. PROFIT (Exhibit 6) ($ thousand): 1,096 817 2,326 4,357 4,845 3,597
Tax @ 48.7% 534 398 1,133 2,122 2,359 1,752
Net Income 562 419 1,193 2,235 2,485 1,845
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 Average
Debt 104 150 155 170 162
Market Value of Equity 162 284 326 386 329
D/EV 0.39 0.35 0.32 0.31 0.33 0.34
KERR-MCGEE
Debt 162 218 318 301 261
Market Value of Equity 1798 1782 1755 1214 1239
D/EV 0.08 0.11 0.15 0.20 0.17 0.14
GEORGIA-PACIFIC
Debt 871 903 450 737 835
Market Value of Equity 1410 2501 3741 2882 2476
D/EV 0.38 0.27 0.11 0.20 0.25 0.24
BRUNSWICK CHEMICAL
Debt 0.59 0.57 0.53 0.49 0.48
Market Value of Equity 6.04 5.77
D/EV 0.08 0.08 0.08
SOUTHERN CHEMICALS
Debt 0.80 0.75 0.74 0.67 0.63
Market Value of Equity 4.96 4.67
D/EV 0.12 0.12 0.12
41008
3887832
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 18
Exhibit 1
Page 19
Exhibit 1
Page 20
Exhibit 1
(a) Equal to earnings before interest and taxes divided by interest expenses.
(b) Standard & Poor's rating/Moody's rating.
Page 21
Exhibit 2
Page 22
Exhibit 2
Page 23
Exhibit 2
(a) Equal to earnings before interest and taxes divided by interest expenses.
(b) Standard & Poor's rating/Moody's rating.
Page 24
Exhibit 5
Page 25
Exhibit 5
Page 26
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 27
Exhibit 6
MANUFACTURING COSTS
VARIABLE
Power $2,935 $3,395 $4,631 $5,530 $6,173 $6,759
Graphite 354 369 545 653 689 714
Salt & other 693 800 1,047 1,274 1,307 1,385
Total variable $3,982 $4,564 $6,223 $7,457 $8,169 $8,858
FIXED
Labor $590 $608 $646 $739 $924 $1,072
Maintenance 143 201 220 272 235 237
Other 474 659 902 1,063 509 1,107
Total fixed $1,207 $1,468 $1,768 $2,074 $1,668 $2,416
Total Manufacturing
costs $5,189 $6,032 $7,991 $9,531 $9,837 $11,274
OTHER CHARGES
Depreciation $433 $394 $402 $391 $384 $399
Selling 114 92 126 155 181 204
R&D 105 154 207 274 351 429
Total $652 $640 $735 $820 $916 $1,032
(a) Expected
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Exhibit 6
EXHIBIT 6
(cont.)
For years ended December 31
1974 1975 1976 1977 1978 1979 (a)
ASSETS
Accounts receivabl $701 $779 $1,128 $1,456 $1,575 $1,622
Inventories 254 544 681 647 639 651
Net property, plant
& equipment 4,066 3,978 4,003 3,853 3,964 4,014
Total $5,021 $5,301 $5,812 $5,956 $6,178 $6,287
LIABILITIES
Accounts payable 402 472 619 780 795 873
Operating profit/
net assets 23.7% 16.9% 44.8% 84.2% 90.0% 66.4%
(a) Expected
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Exhibit 7
(a) Expected.
(b) 1979 value as of 10/30/79
EBIT
Page 30