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Corporate Finance

Answer :

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.

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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

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.

2. 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:

value of targeting firm

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).

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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.

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