Wansley Portal Inc., a large Internet service provider, is evaluating the possible acquisition of Alabama Connections Company (ACC), a regional Internet service provider. Wansley's analysts project the following post merger data for ACC (in thousands of dollars): Net sales Selling and administrative expense Interest 2021 $500 60 2022 $600 70 40 2023 $700 80 45 2024 $760 90 60 2025 $806 96 74 30 If the acquisition is made, it will occur on January 1, 2021. All cash flows shown in the income statements are assumed to occur at the end of the year. ACC currently has a capital structure of 30 percent debt, which costs 9 percent, but Wansley would increase that to 40 percent debt, costing 10 percent if the acquisition were made. ACC, if independent, would pay taxes at 25 percent, and its income would be taxed at 25 percent if it werre consolidated. ACC's current market-determined beta is 1.40. The cost of goods sold is expected to be 65 percent of sales. Gross investment in operating assets is expected to be equal to depreciation--replacing worn out equipment, so net investment in operating assets will be zero. The risk-free rate is 7 percent, and the market risk premium is 6.5 percent. Wansley currently has $400,000 in debt outstanding. Use the compressed APV model to answer the following questions. 25% 25% 65% 30% 9% 40% Tax rate of ACC before the merger Tax rate after merger Cost of goods sold as a % of sales Debt ratio (percent financed with debt) before the merger Cost of debt before merger Debt ratio (percent financed with debt) after the merger Cost of debt after merger Beta of ACC Risk-free rate Market risk premium Terminal growth rate of free cash flow Pre-merger debt (in thousands) 10% 1.40 7% 6.5% 6.0% 400 $ a. What is the unlevered cost of equity? The unlevered cost of equity should be used to discount the FCFs, tax shields and horizon value. Step 1: Find the levered cost of equity at old capital structure. n= Step 2: Find the unlevered cost of equity. ru- b. What is the horizon value of the tax shields and the unlevered operations? What is the value of ACC's operations and the value of ACC's equity to Wansley's shareholders ? Before we can proceed with this problem, we must generate pro forma income statements for ACC's operations after the proposed merger so we can calculate free cash flow and interest tax shields. 2021 2022 2023 2024 2025 Sales Wansley Portal Inc., a large Internet service provider, is evaluating the possible acquisition of Alabama Connections Company (ACC), a regional Internet service provider. Wansley's analysts project the following post merger data for ACC (in thousands of dollars): Net sales Selling and administrative expense Interest 2021 $500 60 2022 $600 70 40 2023 $700 80 45 2024 $760 90 60 2025 $806 96 74 30 If the acquisition is made, it will occur on January 1, 2021. All cash flows shown in the income statements are assumed to occur at the end of the year. ACC currently has a capital structure of 30 percent debt, which costs 9 percent, but Wansley would increase that to 40 percent debt, costing 10 percent if the acquisition were made. ACC, if independent, would pay taxes at 25 percent, and its income would be taxed at 25 percent if it werre consolidated. ACC's current market-determined beta is 1.40. The cost of goods sold is expected to be 65 percent of sales. Gross investment in operating assets is expected to be equal to depreciation--replacing worn out equipment, so net investment in operating assets will be zero. The risk-free rate is 7 percent, and the market risk premium is 6.5 percent. Wansley currently has $400,000 in debt outstanding. Use the compressed APV model to answer the following questions. 25% 25% 65% 30% 9% 40% Tax rate of ACC before the merger Tax rate after merger Cost of goods sold as a % of sales Debt ratio (percent financed with debt) before the merger Cost of debt before merger Debt ratio (percent financed with debt) after the merger Cost of debt after merger Beta of ACC Risk-free rate Market risk premium Terminal growth rate of free cash flow Pre-merger debt (in thousands) 10% 1.40 7% 6.5% 6.0% 400 $ a. What is the unlevered cost of equity? The unlevered cost of equity should be used to discount the FCFs, tax shields and horizon value. Step 1: Find the levered cost of equity at old capital structure. n= Step 2: Find the unlevered cost of equity. ru- b. What is the horizon value of the tax shields and the unlevered operations? What is the value of ACC's operations and the value of ACC's equity to Wansley's shareholders ? Before we can proceed with this problem, we must generate pro forma income statements for ACC's operations after the proposed merger so we can calculate free cash flow and interest tax shields. 2021 2022 2023 2024 2025 Sales
