Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250



Fundamentals of Financial Manageme...

15th Edition
Eugene F. Brigham + 1 other
ISBN: 9781337395250
Textbook Problem

MERGER ANALYSIS Trans World 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 thousands of dollars):

2018 2019 2020 2021
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 8%
Market risk premium 4%
Continuing growth rate of cash flow available to TransWorld 7%

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 35% if it were consolidated. GCC’s 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 TransWorld’s shareholders. The risk-free rate is 8%, and the market risk premium is 4%.

  1. a. What is the appropriate discount rate for valuing the acquisition?
  2. b. What is the continuing value?
  3. c. What is the value of GCC to TransWorld?


Summary Introduction

To Determine: The appropriate discount rate for valuing the acquisition.

Introduction: A merger is the mix of two organizations into one by either shutting the old entities into one new entity or by one organization engrossing the other. In other terms, at least two organizations are united into one organization to form a merger.


Determine the appropriate discount rate for valuing the acquisition



Summary Introduction

To Determine: The continuing value.


Summary Introduction

To Determine: The value of Company GC to Company TCI .

Still sussing out bartleby?

Check out a sample textbook solution.

See a sample solution

The Solution to Your Study Problems

Bartleby provides explanations to thousands of textbook problems written by our experts, many with advanced degrees!

Get Started

Additional Business Solutions

Find more solutions based on key concepts

Show solutions add

What is inflation and what causes it?

Brief Principles of Macroeconomics (MindTap Course List)

(Costs in the Short Run) Identify each of the curves in the following graph:

ECON: MICRO4 (New, Engaging Titles from 4LTR Press)

What are the disadvantages of a sole proprietorship?

Foundations of Business (MindTap Course List)

What is multilevel security?

Accounting Information Systems

Bedrock Company has 70 million in debt and 30 million in equity. The debt matures in 1 year and has a 10% inter...

Fundamentals of Financial Management, Concise Edition (with Thomson ONE - Business School Edition, 1 term (6 months) Printed Access Card) (MindTap Course List)