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American Chemical Corporation Hbs Case Number: 9-290-102

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Bilal Al- Qureshi, Said Business School, University of Oxford 2010

American Chemical Corporation HBS Case Number: 9-290-102
Executive Summary The American Chemical Corporation (AMC) is a large, diversified chemical producer. In 1979, AMC was forced to issue a tender to sell a Sodium Chlorate plant, near Collinsville, Alabama. Dixon, a specialty chemicals company, was willing to purchase the aforementioned plant for $12m with the option to invest a further $2.25m on laminate technology. The subsequent investment in Laminate technology was expected to eliminate graphite costs and reduce power consumption at the Collinsville plant by 15% to 20%. We will evaluate the acquisition of the Collinsville by Dixon at the proposed price. Table 1 identifies the assumptions that have been used for the evaluation of this acquisition. Table 1
Assumptions Laminate Technology reduces power by a mean of 17.5% Laminate Technology is depreciated over 10 years Sodium Chlorate price growth is 8%, per annum Power cost (per KWH) growth is 12%, per annum Plant Life is 10 years Plant Salvage Value is zero EBIT is flat after 1984 Capital Expenditures: $600,000 per annum after 1984 Net Working Capital Remains flat after 1984 Definition of “Flat” Reference Pg 3, HBS 9-280-102 Pg 3, HBS 9-280-102 Pg 4, HBS 9-280-102 Pg 4, HBS 9-280-102 Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 1, Assessed work Sheet Pg 4 http://www.imf.org/external/pubs/ft/wp/2006/wp06218.pdf

6.5% is the Equity Risk Premium Tax rate is 48.69% From 1984 to 1989, the following growth rates are used 4 year Growth rate is used for Variable Costs Capital investment is based on figures from 1980-1984 PPE and depreciation is based on figures from 1980-1984 Beta Debt is zero Debt to Equity Ratio: 35% : 65% Plant: Valuation starts in 1980 Laminate Tech valuation starts in 1981

Slide 21, Risk and Return, class...


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