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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

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 Transworld 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 35% if it were consolidated. GCC current market-determined beta is 1.4, and its investment bankers think that its beta would rise to 1.5 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 80% 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 TransWorld shareholders. The risk-free rate is 7%, and the market risk premium is 4%. 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? ( thousands) to 1 decimal

3. what is the value of GCC to transWorld? ( thousands) to 1 decimal

2015

2016

2017

2018

Net sales

$464

$526

$559

$591

Selling and administrative expense

44

54

64

73

Interest

18

21

24

27

Tax rate after merger

35%

Cost of goods sold as a percent of sales

80%

Beta after merger

1.50

Risk-free rate

4%

Market risk premium

7%

Continuing growth rate of cash flow available to Martin

4%

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