Merger Analysis TransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company TransWorld's analysts project the following post-merger data for GCC (in thousand of dollars): 2015 2016 2017 2018 Net Sales Selling and administrative expense Interest Tax rate after merger Cost of goods sold as a percent of sales Beta after merger Risk-free rate Market risk premium Continuing growth rate of cash flow available to TransWorld $481 42 $531 48 $559 $596 61 53 18 21 27 40% 65% 1.670 8% 396 9% 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 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 hasa 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 1.60, and its investment bankers think that its beta will rise to 1.670 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 65% of sales, but could var somewhat Depreciation-generate funds would be used to e lace worn out equipment, so they would not be available to Transworld's shareholders. The risk-free rate is 8%, and the market risk premium is 3%. Do not round intermediate calculations a. What is the appropriate discount rate for valuing the acquisition? % (to 2 decimals) b. What is the continuing value? thousand (to 1 decimal) c. What is the value of GCC to TransWorld? thousand (to 1 decimal) Merger Analysis TransWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Georgia Cable Company (GCC), a regional cable company TransWorld's analysts project the following post-merger data for GCC (in thousand of dollars): 2015 2016 2017 2018 Net Sales Selling and administrative expense Interest Tax rate after merger Cost of goods sold as a percent of sales Beta after merger Risk-free rate Market risk premium Continuing growth rate of cash flow available to TransWorld $481 42 $531 48 $559 $596 61 53 18 21 27 40% 65% 1.670 8% 396 9% 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 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 hasa 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 1.60, and its investment bankers think that its beta will rise to 1.670 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 65% of sales, but could var somewhat Depreciation-generate funds would be used to e lace worn out equipment, so they would not be available to Transworld's shareholders. The risk-free rate is 8%, and the market risk premium is 3%. Do not round intermediate calculations a. What is the appropriate discount rate for valuing the acquisition? % (to 2 decimals) b. What is the continuing value? thousand (to 1 decimal) c. What is the value of GCC to TransWorld? thousand (to 1 decimal)
