Answered step by step
Verified Expert Solution
Question
1 Approved Answer
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
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 $531 $559 $596 42 48 53 61 18 21 24 27 4096 65% 1.670 8% 3% 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 capital structure of 40 % debt, but Trans World would increase that to 50% if the acquisition were made. C if independe t 0 Bytaxes at , but tsncome 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 vary some at Depreciation-generated funds would be used to place 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? 13 % (to 2 decimals) b. What is the continuing value? 1057.4thousand (to 1 decimal) c. What is the value of GCC to TransWorld? 817.6 thousand (to 1 decimal)
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started