Background and Strategic Issues In June 1979, American Chemical Corporation, a large diversified chemical company, acquired Universal Paper Corporation. While working on the structure of the deal, both the federal government and Universal's management team created various legal constraints, arguing that if the acquisition took place, American Chemical Corporation would become the largest producer of sodium chlorate, violating the laws US antitrust and the Clayton Act. That said, American Chemical Corporation has agreed to reduce its capacity to produce sodium chlorate by selling one of its plants in Collinsville, Alabama. That same year, Dixon Corporation, a large chemical manufacturer, decided to acquire the Collinsville plant for $12 million. There are several factors that Dixon must evaluate before purchasing the system. First, there are large, diversified chemical companies competing in the sodium chlorate industry, which could easily compete on economies of scale and scope. There are also two companies that are expanding their sodium chlorate operations by building large plants in Georgia and Mississippi. Second, by financing this project with 100% debt capital, Dixon's book debt-to-total capital ratio will increase to 47%. This will in turn raise Dixon's debt-to-GDP ratio above its 35% target, which will increase business and financial risk, especially for shareholders. Third, it is also important to point out that, as part of the agreement, Dixon will have to pay an additional $2.25 million for the installation of the new lamination technologies. Although this new technology would decrease system costs and reduce energy needs, it still represents an additional cost. Finding Beta For the cost of capital, we first had to f... half the paper... Company and the Louisiana Paper Company were planning to enter the sodium chlorate industry. Their plants were expected to have capacities of 40,000 and 35,000 tons, respectively, and be located in Gainsville, Georgia and Greenville, Mississippi. The Collinsville, Alabama plant that we are looking to purchase has a capacity of 40,000 tons. If you consider the capacity of our plant compared to others, there is not much difference. In terms of location, the Gainsville, George plant is far from us and therefore should not consume too much market share. Although the Greenville, Mississippi plant is close to us, its capacity is much lower and therefore it could lose market share to us as demand increases. Additionally, we already have relationships with existing chemical buyers, particularly buyers at the Collinsville plant, which gives us an advantage over competitors entering the market.