americanchemical

americanchemical - BL= Bu Bu(D/E Brunswick Chemical BL=1.1...

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American Chemical 2. The tax rate of American Chemical is 48%, which is calculated by looking at Exhibit 7. We also know that the target debt to equity ratio is 35%. In order to find the beta of the levered firm, the beta of the unlevered Collinsville must be calculated. Collinsville is a company within American Chemical that is not traded on the market. They systematic risk of the project could be the risk of the production of sodium chlorate in the industry. To estimate the beta (business risk), we would use the betas of comparable firms that are in the same business risk category. According to the case, Brunswick Chemical and Southern Chemical specialize in producing Sodium Chlorate, the exact same business as Collinsville.
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Unformatted text preview: BL= Bu+Bu(D/E) Brunswick Chemical BL=1.1 D=15% x 3.2 = .48 Number of shares = Net Income/EPS = $790,000/$1.58 = 500,000 shares E= (# of shares * closing price) = (500,000 x 11.5) = $5.75 million D/E = .48/5.75 = .083 Bu+Bu(.083) = 1.1 Bu = 1.02 Southern Chemical BL= 1.2 D= 21% x 3.0 =.63 Number of Shares = $730,000 / $3.66 E= (199,454 x 23) = $4.59 million D/E = .63/4.59 = .137 Bu+Bu(1.37) =1.2 Bu=1.06 Average of betas for Brunswick and Southern Chemical (1.02 + 1.06)/ 2 = 1.04 Finding BL for Collinsville: BL= Bu (1+D/E) = 1.04 x (1+ .35/.65) = 1.06 Cost of Equity Rs = Rrf +BL (MRP) Rs = 9.5% +1.6 x 7.5% = 21.5% WACC: WACC = Wd(1- T)(rd) + (Ws)(Rs) WACC = .35(1-.48) x 11.25% + .65 x 21.5% = 16% WACC = 16%...
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americanchemical - BL= Bu Bu(D/E Brunswick Chemical BL=1.1...

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