Merger Analysis TransWorld Communications Inc., a large telecommunications compa
ID: 2727668 • Letter: M
Question
Merger Analysis
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 following post-merger data for GCC (in thousand of dollars):
If the acquisition is made, it will occur on January 1, 2015. 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 35% if it were consolidated. GCC's current market-determined beta is 1.2, and its investment bankers think that its beta will rise to 1.3 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 80% of sales, but 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 9%, and the market risk premium is 4%. Do not round intermediate calculations.
A. What is the appropriate discount rate for valuing the acquisition?
14.20 % (to 2 decimals)
B. What is the continuing value?
$------- thousand (to 1 decimal)
C. What is the value of GCC to TransWorld?
$------- thousand (to 1 decimal)
Merger Analysis
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 following post-merger data for GCC (in thousand of dollars):
2015 2016 2017 2018 Net Sales $442 $513 $544 $584 Selling and administrative expense 43 49 56 65 Interest 18 21 24 27 Tax rate after merger 35% Cost of goods sold as a percent of sales 80% Beta after merger 1.30 Risk-free rate 9% Market risk premium 4% Continuing growth rate of cash flow available to TransWorld 5%If the acquisition is made, it will occur on January 1, 2015. 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 35% if it were consolidated. GCC's current market-determined beta is 1.2, and its investment bankers think that its beta will rise to 1.3 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 80% of sales, but 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 9%, and the market risk premium is 4%. Do not round intermediate calculations.
A. What is the appropriate discount rate for valuing the acquisition?
14.20 % (to 2 decimals)
B. What is the continuing value?
$------- thousand (to 1 decimal)
C. What is the value of GCC to TransWorld?
$------- thousand (to 1 decimal)
Explanation / Answer
Above value is calculated for post merger, but due to absence of information on existing earning, Existing value could not be ascertained.
if existing cash flow detail is given then following step will be done to solve the requirement:
Step-1: Value as above
Step-2: Value of existing cash flow in the same way but with existing cash flow.
Step-3: Difference of Step-1 and Step-2 is the value of GCC to transworld.
(A) (B) 2015 2016 2017 2018 Total Net sales 442 513 544 584 Value at year end 2018 Less:Cost of goods sold 354 410 435 467 = 16*(1.05)/(.142-.05) Gross Profit 88 103 109 117 = 183 Less: Selling and administration 43 49 56 65 Present value Interest 18 21 24 27 = 183*.588 Earning before tax 27 33 29 25 = 108 Tax 10 11 10 9 Earning after tax 18 21 19 16 Discount factor @14.2% .876 .767 .671 .588 Present value 15.60 16.25 12.57 9.48 53.89 Total (A)+(B) = 162