If the acquisition is made, it will occur on January 1, 2015. All cash flows shown in the income statements are assumed to occur at the end of the year. Columbia currently has a capital structure of 40% debt, but Martin would increase that to 50% if the acquisition were made. Columbia, if independent, would pay taxes at 20%; but its income would be taxed at 35% if it were consolidated. Columbias current market-determined beta is 1.15, and its investment bankers think that its beta would rise to 1.3000 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 75% of sales, but it could vary somewhat. Depreciation-generated funds would be used to replace worn-out equipment, so they would not be available to Martins shareholders. The risk-free rate is 5%, and the market risk premium is 8%.

What is the appropriate discount rate for valuing the acquisition? $______% (to 4 decimals)

If the acquisition is made, it will occur on January 1, 2015. All cash flows shown in the income statements are assumed to occur at the end of the year. GCC currently has a capital structure of 40% debt, but Trans World would increase that to 50% if the acquisition were made. GCC, if independent, would pay taxes at 20%; but its income would be taxed at 40% if it were consolidated. GCC's current market-determined beta is 1.6, and its investment bankers think that its beta will rise to 1.7 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 65% of sales, but could vary somewhat. Depreciation-generated funds would be used to replace worn-out equipment, so they would not be available to TransWorld's shareholders. The risk-free rate is 6%, and the market risk premium is 3%. Do not round intermediate calculations.

1. What is the appropriate discount rate for valuing the acquisition?____ % (to 2 decimals)
2. What is the continuing value? $____ thousand (to 1 decimal)
3. WhatisthevalueofGCCtoTransWorld?$_____thousand(to1decimal

Problem 21-2

Merger Valuation

Harrison Corporation is interested in acquiring Van Buren Corporation. Assume that the risk-free rate of interest is 4%, and the market risk premium is 5%.

Harrison estimates that if it acquires Van Buren, the year-end dividend will remain at $2.38 a share, but synergies will enable the dividend to grow at a constant rate of 6% a year (instead of current 5%). Harrison also plans to increase the debt ratio of what would be its Van Buren subsidiary; the effect of this would be to raise Van Buren's beta to 1.15. What is the per-share value of Van Buren to Harrison Corporation? Do not round intermediate calculations. $______ (to 2 decimals)