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Professor Kratchman
Finance 302
February 22, 2012
Hansson Private Label, Inc.: A Case Study
Through our analysis we have deemed that the proposed expansion of Hansson
Private Label will benefit the company through added revenue, profit, and market share.
The following are our findings to further explain our decision.
The strategic implications of companys expansion proposal are simple. First,
increasing profits through expansion of production and of sales. Second and most
important, is an increase in market share by driving both new customers and existing
customers away from competitors. Also, an increase in production to drive the companys
growing market share.
We feel that Gates projections are realistic for the companys expansion. The
projections are viable because they have an above 75% chance of returning a positive net
present value (NPV) in addition to a solid internal rate of return (IRR) and would expand
the relationships of the company with its competitors and clients. A Sharpe ratio of 0.946
also suggests a positive return in relationship to the added risk assuming ours is higher
than other projects.
After our analysis of both the project and industry we chose a WACC of 9.238%.
This WACC value was chosen as it was most in line with the markets debt-to-value
ratio. This project would increase both capital structure and risk; however according to
the Sharpe ratio the increase in capital structure justifies the risk.
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Through our sensitivity analysis we have deemed the selling price to be more
sensitive to a change in net present value than direct material costs. This was found via a
difference in slope. As for any long-term inflation rates, we have deemed them negligible
compared to Gates predictions as inflation affects the market and industry as a whole
and not just our company.
Based upon previous years income and market share for HPL we decided upon a
consistent 5% capacity increase until it reached 85% in 2014. We see this as an
appropriate assumption due to the production reaching its maturity in its sixth year.
In conclusion, through our extensive analysis we have decided that it would be
within the companys best interest to proceed with the investment and proposal. We
would maintain positive relationship and positive growth within our respective market.












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APPENDIX

HCL Ratios:


Filled out ratios
WACC calculation:

Debt to value is thrown off by Cathleen Sinclairs debt to equity
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Took out Cathleen Sinclair
Chose Wacc of 9.238 based on new debt to equity ratio


Base Case:

Assumed capacity growth of 5% per year
o Based on previous revenues and projection of more demand
from customers

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Worst:
Assumed units stayed consistent after year 4
o Based on contract with customer ending
Best:

Assumed growth rate of 2%
o Assumed growth based average economic growth
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y = 2E+07x - 9E+07
y = 1E+07x - 5E+07
y = 385191x + 5E+06
$(80,000,000.00)
$(60,000,000.00)
$(40,000,000.00)
$(20,000,000.00)
$-
$20,000,000.00
$40,000,000.00
$60,000,000.00
$80,000,000.00
$100,000,000.00
1 2 3 4 5 6 7 8 9
Selling Price
Direct Material
Capacity Utilization
Linear (Selling Price)
Linear (Direct Material)
Linear (Capacity
Utilization)
Sensitivity analysis:











Slope of lines suggest what variables are more sensitive to NPV
o Selling price is most sensitive
o Capacity utilization is least sensitive