Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Unice Update to keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. L80 + x v fx B C D E F

image text in transcribed
image text in transcribed
Unice Update to keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. L80 + x v fx B C D E F G H 4 K 5 6 Wansley Portal Inc., a large Internet service provider, is evaluating the possible acquisition of Alabama Connections Company 7 (ACC), a regional Internet service provider. Wansley's analysts project the following post merger data for ACC (in thousands of 8 dollars): 9 10 2021 2022 2023 2024 2025 11 Net sales $500 $600 $700 $760 $806 12 Selling and administrative expense 60 70 80 90 96 13 Interest 30 40 45 60 74 14 15 16 If the acquisition is made, le will occur on January 1, 2021. All cash flows shown in the income statements are assumed to occur 17 at the end of the year. ACC currently has a capital structure of 30 percent debt, which costs 9 percent, but Wansley would 18 increase that to 40 percent debt, costing 10 percent of the acquisition were made. ACC, if independent, would pay taxes at 25 19 percent, and its income would be taxed at 25 percent if it werre consolidated. ACC's current market-determined beta Is 1.40. 20 The cost of goods sold is expected to be 65 percent of sales. Gross Investment in operating assets is expected to be equal to 21 depreciation-replacing worn out equipment, so net investment in operating assets will be zero. The risk-free rate is 7 percent, 22 and the market risk premium is 6.5 percent. Wansley currently has $400,000 in debt outstanding. Use the compressed APV 23 model to answer the following questions. 24 25 26 Tax rate of ACC before the merger 25% 27 Tax rate after merger 25% 28 Cost of goods sold as a % of sales 65% 29 Debt ratio (percent financed with debt) before the merger 30% 30 Cost of debt before merger 9% 31 Debt ratio (percent financed with debt) after the merger 40% 32 Cost of debt after merger 10% 33 Beta of ACC 1.40 34 Risk-free rate 7% 35 Market risk premium 6.5% 36 Terminal growth rate of free cash flow 6.0% 37 Pre-merger debt (in thousands) $ 400 38 39 a. What is the unlevered cost of equity? 40 41 The univered cost of ouit should be used to discount the FCEs tax shinlds and horizon value Build a Model Office Update To keep up-to-date with security updates, foxes and improvements, choose check for Updates L8O B D E G H K 16 If the acquisition is made, it will occur on January 1, 2021. All cash flows shown in the income statements are assumed to occur 17 at the end of the year. ACC currently has a capital structure of 30 percent debt, which costs 9 percent, but Wansley would 18 increase that to 40 percent debt, costing 10 percent of the acquisition were made. ACC, Independent, would pay taxes at 25 19 percent, and its income would be taxed at 25 percent if it werre consolidated. ACC's current market-determined beta is 1.40. 20 The cost of goods sold is expected to be 65 percent of sales. Gross Investment in operating assets is expected to be equal to 21 depreciation--replacing worn out equipment, so net investment in operating assets will be zero. The risk-free rate is 7 percent, 22 and the market risk premium is 6.5 percent. Wansley currently has $400,000 in debt outstanding. Use the compressed APV 23 model to answer the following questions. 24 25 26 Tax rate of ACC before the merger 25% 27 Tax rate after merger 25% 28 Cost of goods sold as a % of sales 65% 29 Debt ratio (percent financed with debt) before the morger 30% 30 Cost of debt before merger 9% 31 Debt ratio (percent financed with debt) after the merger 40% 32 Cost of debt after merger 10% 33 Beta of ACC 1.40 34 Risk-free rate 7% 35 Market risk premium 6.5% 36 Terminal growth rate of free cash flow 6.0% 37 Pro-merger debt (In thousands) 400 38 39 a. What is the unlovered cost of equity? 40 41 The unlevered cost of equity should be used to discount the FCFs, tax shields and horizon value. 42 43 44 Step 1: Find the levered cost of equity at old capital structure. 45 46 47 48 Stop 2: Find the unlovered cost of equity. 49 50 ru" 51 Unice Update to keep up-to-date with security updates, fixes, and improvements, choose Check for Updates. L80 + x v fx B C D E F G H 4 K 5 6 Wansley Portal Inc., a large Internet service provider, is evaluating the possible acquisition of Alabama Connections Company 7 (ACC), a regional Internet service provider. Wansley's analysts project the following post merger data for ACC (in thousands of 8 dollars): 9 10 2021 2022 2023 2024 2025 11 Net sales $500 $600 $700 $760 $806 12 Selling and administrative expense 60 70 80 90 96 13 Interest 30 40 45 60 74 14 15 16 If the acquisition is made, le will occur on January 1, 2021. All cash flows shown in the income statements are assumed to occur 17 at the end of the year. ACC currently has a capital structure of 30 percent debt, which costs 9 percent, but Wansley would 18 increase that to 40 percent debt, costing 10 percent of the acquisition were made. ACC, if independent, would pay taxes at 25 19 percent, and its income would be taxed at 25 percent if it werre consolidated. ACC's current market-determined beta Is 1.40. 20 The cost of goods sold is expected to be 65 percent of sales. Gross Investment in operating assets is expected to be equal to 21 depreciation-replacing worn out equipment, so net investment in operating assets will be zero. The risk-free rate is 7 percent, 22 and the market risk premium is 6.5 percent. Wansley currently has $400,000 in debt outstanding. Use the compressed APV 23 model to answer the following questions. 24 25 26 Tax rate of ACC before the merger 25% 27 Tax rate after merger 25% 28 Cost of goods sold as a % of sales 65% 29 Debt ratio (percent financed with debt) before the merger 30% 30 Cost of debt before merger 9% 31 Debt ratio (percent financed with debt) after the merger 40% 32 Cost of debt after merger 10% 33 Beta of ACC 1.40 34 Risk-free rate 7% 35 Market risk premium 6.5% 36 Terminal growth rate of free cash flow 6.0% 37 Pre-merger debt (in thousands) $ 400 38 39 a. What is the unlevered cost of equity? 40 41 The univered cost of ouit should be used to discount the FCEs tax shinlds and horizon value Build a Model Office Update To keep up-to-date with security updates, foxes and improvements, choose check for Updates L8O B D E G H K 16 If the acquisition is made, it will occur on January 1, 2021. All cash flows shown in the income statements are assumed to occur 17 at the end of the year. ACC currently has a capital structure of 30 percent debt, which costs 9 percent, but Wansley would 18 increase that to 40 percent debt, costing 10 percent of the acquisition were made. ACC, Independent, would pay taxes at 25 19 percent, and its income would be taxed at 25 percent if it werre consolidated. ACC's current market-determined beta is 1.40. 20 The cost of goods sold is expected to be 65 percent of sales. Gross Investment in operating assets is expected to be equal to 21 depreciation--replacing worn out equipment, so net investment in operating assets will be zero. The risk-free rate is 7 percent, 22 and the market risk premium is 6.5 percent. Wansley currently has $400,000 in debt outstanding. Use the compressed APV 23 model to answer the following questions. 24 25 26 Tax rate of ACC before the merger 25% 27 Tax rate after merger 25% 28 Cost of goods sold as a % of sales 65% 29 Debt ratio (percent financed with debt) before the morger 30% 30 Cost of debt before merger 9% 31 Debt ratio (percent financed with debt) after the merger 40% 32 Cost of debt after merger 10% 33 Beta of ACC 1.40 34 Risk-free rate 7% 35 Market risk premium 6.5% 36 Terminal growth rate of free cash flow 6.0% 37 Pro-merger debt (In thousands) 400 38 39 a. What is the unlovered cost of equity? 40 41 The unlevered cost of equity should be used to discount the FCFs, tax shields and horizon value. 42 43 44 Step 1: Find the levered cost of equity at old capital structure. 45 46 47 48 Stop 2: Find the unlovered cost of equity. 49 50 ru" 51

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Information Quality Assurance And Internal Control For Management Decision Making

Authors: William R Kinney

1st Edition

0256221618, 9780256221619

More Books

Students also viewed these Finance questions

Question

Describe the economic impact a disaster can have in a community.

Answered: 1 week ago