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 post-merger data for GCC (in thousands of dollars) gathered in the Excel Online file below. If the acquisition is made, it will occur on January 1, 2018. 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 1.35, and its investment bankers think that its beta will rise to 1.41 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's shareholders. The risk-free rate is 7%, and the market risk premium is 5%. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Use only the values provided in the problem statement (including the Excel Online file) for your calculations. x Open spreadsheet a. What is the appropriate discount rate for valuing the acquisition? Do not round intermediate calculations. Round your answer to two decimal places. % b. What is the continuing value? Do not round intermediate calculations. Enter your answer in thousands of dollars. For example, an answer of $145.2 thousands should be entered as 145.2, not 145,200. Round your answer to two decimal places. thousand c. What is the value of GCC to TransWorld? Do not round intermediate calculations. Enter your answer in thousands of dollars. For example, an answer of $145.2 thousands should be entered as 145.2, not 145,200. Round your answer to two decimal places. thousand DE F G Merger Analysis 2018 466 48 18 in thousands dollars) 2019 2020 518 548 57 63 21 24 2021 581 71 27 Target's Post-Merger Data: Net sales Selling and administrative expense Interest Tax rate after merger Cost of goods sold as a % of sales Target's debt ratio after merger Beta after merger, b_ Risk-free rate, CRF Market risk premium, RP Continuing growth rate of CFs available to acquirer 40.00% 80.00% 50.00% 1.41 7.00% 5.00% 7.00% 1 5 7 Target's Pre-Merger Data: Target's debt ratio before merger Target's tax rate before merger Beta before merger, b_ Unlevered beta, bu 40.00% 20.00% 1.35 0.88 Formula #N/A 1 Discount rate to use in merger analysis, 2018 $466.00 2019 $518,00 2020 S548.00 2021 $581.00 48.00 57.00 63.00 71.00 Sales Cost of goods sold Gross profit Selling and administrative expense EBIT Interest EBT Taxes Net income/Cash flow 18.00 21.00 24.00 27.00 2 4 Formulas Sales Cost of goods sold Gross profit Selling and administrative expense EBIT Interest EBT 2 Taxes 3 Net income/Cash flow 2018 =C4 #N/A # =C5 #N/A =C6 #N/A #N/A #N/A 2019 =D4 #N/A #N/A =D5 #N/A =D6 #N/A #N/A #N/A 2020 2021 E4F4 #N/A # #N/A #N/A E5 =F5 #N/A #N/A =E6 =F6 #N/A #N/A #N/A #N/A #N/A #N/A
