Hansson Private Label (HPL) is a manufacturer of personal care products such as shampoo, soap, mouthwash, sunscreen and shaving cream. The company started in 1992 when it purchased assets from Simon Health and Beauty Products. The company was purchased by Mr Hanson for $42 million - $17 million of which was raised through debt financing. The investment represented significant risk for Hanson because a significant portion of his wealth was tied up is a single investment. However, Hanson considered it an attractive investment because he believed that he was paying significantly less than the replacement cost of the assets purchased. Over the past sixteen years, Hanson has grown the company at a conservative but persistent fashion. He is now faced with an investment opportunity that promises swift growth, but also accompanies significant amount of risk.
1. How would you describe HPL and its position within the private label personal care industry?
2. Using assumptions made by Executive VP of Manufacturing, Robert Gates, estimate the project’s FCF’s. Are Gates’ projections realistic? If not, what changes might you incorporate?
3. Using CFO Sheila Dowling’s WACC schedule, what discount rate would you choose? What flaws, if any, might be inherent in using the WACC as the discount rate?
4. Estimate the project’s NPV. Would you recommend that Tucker Hansson proceed with the investment?
Projections for Expansion Project
Investment Appraisal for Expansion Project 2009-2018
Free Cash Flows, NPV, IRR, MIRR
Calculation of Cost of Capital
Riskfree Rate, Market Risk Premium, EquityBeta, Cost of Equity, Cost of Debt, WACC
Sensitivity Analysis of Key Projections
Decrease of 10% Current Increase of 10%
Capacity Utlilization, Selling Price, WACC, Production Cost
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