10) ALFHA Communications Inc., a large telecommunications company, with 50% Debt which costs 9% and a Beta of 1,3, is evaluating the possible acquisition of British Company (BC), a regional cable company. ALPHA's analysts project the following post-merger data for BC (in thousands of dollars, with a year end of December 31): 2020 2021 2022 2023 2024 2025 2026 Net sales $600 $680 $710 $800 $900 $1,000 Selling and administrative expense 45 53 60 68 83 120 Depreciation 20 22 30 34 39 50 Interest 48 55 87 110 130 140 Total gross operating capital $900 980 900 1,150 1,280 1,300 1,400 Long term debt $400 Marketable Securities $150 Costs of goods sold as a percent of sales: 50% Risk-free rate: 6% Market risk premium: 5% Terminal growth rate of free cash flows: 6% BC currently has a capital structure of 40% debt, which costs 9%, but over the next 6 years Alpha would increase that to 50%. The new target capital structure would be reached by the start of 2026. BC, if independent, would pay taxes at 20%, but its income would be taxed at 40% if it were consolidated. BC's current market-determined beta is 1.20. 06 points a. Calculate the Value of the Unlevered Firm (Base Case). 06 points b. Calculate the value of Tax Shields. 06 points c. Calculate the value of Operations. 07 points d. What is the maximum ALPHA could pay for BC? 10) ALFHA Communications Inc., a large telecommunications company, with 50% Debt which costs 9% and a Beta of 1,3, is evaluating the possible acquisition of British Company (BC), a regional cable company. ALPHA's analysts project the following post-merger data for BC (in thousands of dollars, with a year end of December 31): 2020 2021 2022 2023 2024 2025 2026 Net sales $600 $680 $710 $800 $900 $1,000 Selling and administrative expense 45 53 60 68 83 120 Depreciation 20 22 30 34 39 50 Interest 48 55 87 110 130 140 Total gross operating capital $900 980 900 1,150 1,280 1,300 1,400 Long term debt $400 Marketable Securities $150 Costs of goods sold as a percent of sales: 50% Risk-free rate: 6% Market risk premium: 5% Terminal growth rate of free cash flows: 6% BC currently has a capital structure of 40% debt, which costs 9%, but over the next 6 years Alpha would increase that to 50%. The new target capital structure would be reached by the start of 2026. BC, if independent, would pay taxes at 20%, but its income would be taxed at 40% if it were consolidated. BC's current market-determined beta is 1.20. 06 points a. Calculate the Value of the Unlevered Firm (Base Case). 06 points b. Calculate the value of Tax Shields. 06 points c. Calculate the value of Operations. 07 points d. What is the maximum ALPHA could pay for BC
