The Atlantic Corporation Case Essay

2738 Words Nov 2nd, 2011 11 Pages
Case 1 Atlantic Corporation

Maastricht University School of Business and Economics Corporate Governance and Restructuring

1. Is the acquisition of Royal’s linerboard mill and box plants a sound strategic move? Consider the short- as well as long-term outlook for linerboard prices and the profitability of the linerboard industry. Furthermore, what basis, if any, is there for expecting AtlanticRoyal’s combined linerboard and box mill operations to do better/worse than the industry overall?

The background information about the industry and also a detailed description of the competing firms represent a good base for evaluating the firm’s decision making when engaging in the purchasing project.

From industry background perspective
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Yearly changes in cash outflows needed to finance ongoing operations ( Net Working Capital) are accounted for.

Solving for equation (1) using data provided in the case material yields the following result.

Free Cash Flow Analysis EBIT - Tax payable + Depreciation expense - Gross fixed asset exp. - ∆ Net working capital Free cash flow

1984 31,4 11,3 20,9 19,2 9,0 12,8

The above methodology can be applied to determine the free cash flows to the firm covering the period 1983-1993.

The cash flows are now discounted at the weighted average cost of capital (WACC) to arrive at the present value of those future cash flows (this parameter is initially set to 13%). To this aim, we introduce the present value formula in equation (2).

(2) PV ( FCFt )

FCFt (1 WACC ) t

$12 ,8million (1 13 %) 1

$11,3million

The sum of present values of all cash flows in the period under investigation yields a combined present value of $253,1 million. The case material suggest that the terminal value is assumed to be the book value of assets at the end of 1993. According to exhibit 3 of the case material, the book value of mill and box plants is $93,7 million at the end of 1993. We also chose to include this year’s net working capital ($118,0 million) in the terminal value since it may constitute a cash outflow. Discounting the terminal value at the 13% weighted cost of

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