Hansson Private Label Case Study

Hansson Private Label is a private manufacturer of personal care goods. HPL partners with retail brands who sell the products under their label in various types of consumer goods stores. Playing a major role in the personal care industry, HPL’s mission is to be a leading provider of high quality private label personal care products to America’s leading retailers. Retail sales for private label products in the personal care category was $4 billion of sales at retail. HPL also holds around a 28% share of a total of $2.4 billion in wholesale sales from manufacturers within the private label industry. Despite the role it plays in the industry--as a manufacturer--HPL has no control over the production, packaging and promotion of the goods, as these decisions are made by the retailers. As of now, the year 2007, HPL is operating at near full capacity, but must decide if an offer by one of its retail customers to increase HPL’s share of their manufacturing is a safe decision financially. HPL must make a decision within the next 30 days. The future cash flows provided by the potential partnership are shown below.

FREE CASH FLOW ANALYSIS

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We decided to calculate the years 2009-2011 because the contract is only officially good for three years. If the years of the contract don’t give attractive numbers, a contract extension is not likely to be made. Before any decisions can be made, cash flows need to be calculated. The figure above shows all the calculations, descriptions, and where the numbers were pulled from. Using the equation (revenue - cost - depreciation)(1 - tax rate) + depreciation - capital expenditure - change in net working capital, we are able to find the cash flows for the years of 2009-2011.Gate’s projections do not seem realistic due to the fact that the financial estimation lasts ten years. Meanwhile, the contract that HPL made is only three years. There is a chance that revenue will be reduced as well as the free cash flows.

We would chose the WACC of 9.38% because it has the closest D/V to our assumption of 20.9%. We will want to use this value with caution because the WACC only provides a reliable discount rate when the project has the same level of risk as the firm. We know that this project does not have the same level of risk as the firm based on Hansson’s comments in the introduction of the case study and the 115% increase in D/V. We also want to avoid strictly using the WACC value as it can lead us to choose a project with a negative NPV. Lastly, the WACC assumes we can accurately calculate the cost of equity and cost of debt, but sometimes our estimates may be wrong.

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