Dixon Corporation: The Collinsville Plant Case Solution
Answer no 1
The WACC of Dixon has been calculated by simply taking the required information of the company and then the WACC has been calculated which is around 13%. Furthermore, the risk free rate was taken as 9.5% while the market risk premium was calculated by taking the S&P 500 data of expected market return and then the market risk premium was calculated. The cost of debt was calculated as 8% by using the interest rate. However, the cost of equity was calculated by CAPM and it is indicating a figure of 18% which indicates that the equity is much expensive as compared to debt in this case. (Appendix 1,2)
Moreover, the APV of the project has been calculated by using the tax shield formula and taking the interest expense of 1978. While the cash flows which were used to calculate the APV were based on the cash flows after deployment of the laminate technology. The APV is indicating an amount of almost 17 million which indicates that the project is quite feasible and profitable.
Answer no 2
The cash flows have been calculated using the aforesaid assumption and the calculations were based without deploying the laminate technology. However, findings revealed that the firm will have almost 14.3 million of discounted cash flows (NPV) while the firm will also be able to generate around 31.2 million of free cash flows. Moreover, the FCF are ranging from 2.26 million to 4.7 million over the expected life. Finally, this shows that the project is feasible and acceptable to stick with.
Answer no 3
The NPV of the project without Laminate technology indicates that the company will have almost 31.2 million of free cash flows over its expected life. Moreover, the calculations of these cash flows are mentioned in exhibit 8. The calculations are named as without laminate technology.....................
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