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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):

2015201620172018Net Sales$437$492$529$581Selling and administrative expense40465158Interest18212427Tax rate after merger30%Cost of goods sold as a percent of sales75%Beta after merger1.774Risk-free rate6%Market risk premium4%Continuing growth rate of cash flow available to TransWorld6%

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 30% if it were consolidated. GCC's current market-determined beta is 1.60, and its investment bankers think that its beta will rise to 1.774 if the debt ratio were increased to 50%. The cost of goods sold is expected to be 75% 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 6%, and the market risk premium is 4%. Do not round intermediate calculations.

1. What is the appropriate discount rate for valuing the acquisition?
2. % (to 2 decimals)
3. What is the continuing value?
4. $thousand (to 1 decimal)
5. What is the value of GCC to TransWorld?
6. $thousand (to 1 decimal)