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) 2016 $500 60 30 2017 $600 70 40 2019 2020 $700 $760 $806 96 74 2018 Net sales Selling and administrative expense Interest 80 45 90 60 If the acquisition is made, it will occur on January 1, 2016. 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 30 percent, but its income would be taxed at 35 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, but it could vary somewhat. 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 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 flowW Pre-merger debt (in thousands) 30% 35% 65% 30% 5% 40% 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 Step 2: Find the unlevered cost of equity