26 Jul WHAT IS THE APPROPRIATE DISCOUNT RATE FOR VALUING THE ACQUISITION?
TransWorld Communications Inc. a large telecommunications company is evaluating the possible acqu Show more TransWorld Communications Inc. a large telecommunications company is evaluating the possible acquisition of Georgia Cable Company (GCC) a regional cable company. TransWorlds analysts project the following postmerger data for GCC (in thousands of dollars): 2012 2013 2014 2015 Net sales $450 $518 $555 $600 Selling and administrative expense 45 53 60 68 Interest 18 21 24 27 Tax rate after merger 35% Cost of goods sold as a percent of sales 65% Beta after merger 1.50 Risk-free rate 5% Market risk premium 5% Terminal growth rate of cash flow available to TransWorld 5% If the acquisition is made it will occur on January 1 2012. 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 TransWorld 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 35% if it were consolidated. GCCs current market-determined beta is 1.40 and its investment bankers think that its beta would rise to 1.50 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 65% 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 TransWorlds shareholders. The risk-free rate is 5% and the market risk premium is 5%. a. What is the appropriate discount rate for valuing the acquisition? Round your answer to two decimal places. b. What is the terminal value? Enter your answer in thousands. For example an answer of $13000 should be entered as 13. Round your answer to two decimal places. c. What is the value of GCC to TransWorld? Enter your answer in thousands. For example an answer of $13000 should be entered as 13. Round your answer to two decimal places. Show less
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