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 30% if it were consolidated. GCC's current market-determined beta is 1.35, and its investment bankers think that its beta will rise to 1.50 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 TransWorld's shareholders. The risk-free rate is 10%, and the market risk premium is 3%. 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. The appropriate discount rate for valuing the acquisition is 14.5%. A.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 B.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.
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 30% if it were consolidated. GCC's current market-determined beta is 1.35, and its investment bankers think that its beta will rise to 1.50 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 TransWorld's shareholders. The risk-free rate is 10%, and the market risk premium is 3%. 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. The appropriate discount rate for valuing the acquisition is 14.5%. A.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 B.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.
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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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 30% if it were consolidated. GCC's current market-determined beta is 1.35, and its investment bankers think that its beta will rise to 1.50 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 TransWorld's shareholders. The risk-free rate is 10%, and the market risk premium is 3%. 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.
The appropriate discount rate for valuing the acquisition is 14.5%.
A.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
B.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.
Transcribed Image Text:Merger Analysis
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, TRF
Market risk premium, RPM
Continuing growth rate of CFs available to acquire
Target's Pre-Merger Data:
Target's debt ratio before merger
Target's tax rate before merger
Beta before merger, bL
Unlevered beta, bu
Discount rate to use in merger analysis, rs
Sales
Cost of goods sold
Gross profit
Selling and administrative expense
EBIT
Interest
EBT
Taxes
Net income/Cash flow
Formulas
Sales
Cost of goods sold
Gross profit
Selling and administrative expense
EBIT
Interest
EBT
Taxes
Net income/Cash flow
Target's continuing value to acquirer
Target's value to acquirer
30.00%
65.00%
50.00%
1.50
10.00%
3.00%
9.00%
40.00%
20.00%
1.35
0.88
2018
#N/A
2018
$459.00
=C4
459
44
18
=C5
2018
Formula
=C6
44.00
#N/A
#N/A
#N/A
18.00
#N/A
#N/A
#N/A
#N/A
#N/A
(in thousands dollars)
2019
2020
536
53
21
2019
$536.00
53.00
21.00
2019
=D5
=D4
▼ #N/A
▼
#N/A
#N/A
571
63
24
=D6
▼ #N/A
2020
$571.00
=E4
▼ #N/A
▼ #N/A
=E5
▼ #N/A
=E6
▼ #N/A
#N/A
#N/A
#N/A ▼ #N/A
✓
63.00
24.00
2020
2021
601
69
27
2021
$601.00
69.00
27.00
2021
=F4
▼ #N/A
▼ #N/A
=F5
▼ #N/A
=F6
▼ #N/A
#N/A
▼ #N/A
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