Risk And Assets Essay

906 words - 4 pages

1. I assume the Georgia-Pacific, Brunswick Chemical and Southern Chemicals are the identical twins of the Collinsville investment because their net incomes during the 1974 to 1978 period have extremely high correlation with Collinsville’s net income.
Net Income (in millions) | Collinsville | Brunswick Chemical | Georgia-Pacific | Southern Chemicals |
1974 | 1.096 | 0.2 | 164 | 0.1 |
1975 | 0.817 | 0.15 | 148 | -0.05 |
1976 | 2.326 | 0.37 | 215 | 0.28 |
1977 | 4.357 | 0.71 | 262 | 0.74 |
1978 | 4.845 | 0.79 | 302 | 0.73 |
Coefficient of Determination | / | 99.9% | 97.6% | 98.1% |

| Equity Beta | Debt | Equity | Asset Beta |
Brunswick Chemical | 1.1 | 15% | 85% | 0.935 |
...view middle of the document...

2 million (discounting at a 16.09% discount rate)
After subtracting $12 million initial payments for the plant, Net NPV = $ -2.9 million

3.
| 1980 | 1981 | 1982 | 1983 | 1984 | 1985 | 1986 | 1987 | 1988 | 1989 |
Previous profit | 833 | 2,218 | 3,035 | 3,134 | 3,026 | 3,026 | 3,026 | 3,026 | 3,026 | 3,026 |
CS on graphite | 0 | 791 | 875 | 940 | 992 | 1,042 | 1,094 | 1,148 | 1,206 | 1,266 |
CS on power | 0 | 1,354 | 1,643 | 1,842 | 2,062 | 2,309 | 2,586 | 2,896 | 3,244 | 3,633 |
Add’l Cap-Ex | 2,250 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 | 0 |
Total Cap-Ex | 2,735 | 525 | 560 | 600 | 600 | 600 | 600 | 600 | 600 | 600 |
Add’l depr. | 0 | 225 | 225 | 225 | 225 | 225 | 225 | 225 | 225 | 225 |
Total depr. | 1,060 | 1,335 | 1,385 | 1,435 | 1,495 | 1,555 | 1,615 | 1,675 | 1,735 | 1,795 |
New profit | 833 | 4,138 | 5,328 | 5,691 | 5,855 | 6,151 | 6,481 | 6,846 | 7,251 | 7,700 |
New tax expense | 400 | 1,986 | 2,557 | 2,732 | 2,810 | 2,953 | 3,111 | 3,286 | 3,480 | 3,696 |
New FCF | -1,038 | 2,646 | 3,329 | 3,650 | 3,789 | 4,154 | 4,385 | 4,635 | 4,905 | 5,199 |
NPV = $14.1 million (discounting at a 16.09% discount rate, assuming laminate can reduce power usage by...

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