Nova Chemical Essay

Words: 1090
Pages: 5

What is Nova Chemical’s strategy? How do the various divisions relate to the firm’s overall strategy?

Industry analysts are expecting high growth rates for specialty chemicals of 10-15%. As a result, Nova Chemical has a 5 year strategy that focuses on development of the company’s two specialty chemicals divisions: the Laboratory Products Division (LPD) and, more substantially, the Environmental Products Division (EPD). Investment will focus on the company’s EPD division through expansion of new production facilities. Doing so will require the company to consider alternatives in annual financing to handle the sharp increases in needed capital spending. One alternative includes the sale of Nova’s Industrial Products Division which
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is 13.20%. Additionally, by analyzing market ratios and levered betas for similar firms in the basic chemicals industry and employing CAPM, I was able to determine WACC for the IPD as being 13.39%. Both calculations used identical assumptions for the market risk premium (7.47%), tax rate (40%), and the risk free rate (7.91%). The debt rate premium was determined by calculating the difference between the yield for BBB- bonds and the government bond rate. The result is a spread of 3.02% which may seem high, but probably appropriate given the higher risk associated with BBB- rated bonds. Step two involved calculating the value of the Industrial Products Division. Using the corporate WACC of 13.20%, and a discounted cash flow valuation model over 5 years, I was able to value the division at $128.66MM. This valuation was based on the average of the book value of the division, the value as a no-growth perpetuity, and a perpetual growth valuation. Applying the same approach using the IPD WACC gives a valuation of $126.79MM. At first blush, an offer of $160MM would seem to be a pretty good deal for an underperforming division. The third step was to calculate the value of Nova Chemical Corp. as a whole. Again using the exact same valuation model I calculated the value of Nova as a whole to be $950.58MM. I then subtracted the cost of interest-bearing debt ($334.50MM) and divided that amount