Merger analysis
Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company. Vaccaro is a publicly traded company, and its current beta is 1.15. Vaccaro has been barely profitable, so it has paid an average of only 20% in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 30%.
If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly owned subsidiary. Apilado would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35%. Apilado also would increase the debt capitalization in the Vaccaro subsidiary to 50% of assets, which would increase its beta to 1.67. Apilado's acquisition department estimates that Vaccaro, if acquired, would produce the following net cash flows to Apilado's shareholders (in millions of dollars):
Year Net Cash Flows 1 $1.30 2 $1.50 3 $1.75 4 $2.00 5 and beyond Constant growth at 5%
These cash flows include all acquisition effects. Apilado's cost of equity is 14%, its beta is 1.0, and its cost of debt is 9%. The risk-free rate is 5%.
What discount rate should be used to discount the estimated cash flows? (Hint: Use Apilado's rs to determine the market risk premium.)
Round your answer to two decimal places.
%
What is the dollar value of Vaccaro to Apilado? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13.
$ million
Vaccaro has 1.5 million common shares outstanding. What is the maximum price per share that Apilado should offer for Vaccaro? Round your answer to the nearest cent.
$
Merger analysis
Apilado Appliance Corporation is considering a merger with the Vaccaro Vacuum Company. Vaccaro is a publicly traded company, and its current beta is 1.15. Vaccaro has been barely profitable, so it has paid an average of only 20% in taxes during the last several years. In addition, it uses little debt, having a debt ratio of just 30%.
If the acquisition were made, Apilado would operate Vaccaro as a separate, wholly owned subsidiary. Apilado would pay taxes on a consolidated basis, and the tax rate would therefore increase to 35%. Apilado also would increase the debt capitalization in the Vaccaro subsidiary to 50% of assets, which would increase its beta to 1.67. Apilado's acquisition department estimates that Vaccaro, if acquired, would produce the following net cash flows to Apilado's shareholders (in millions of dollars):
| Year | Net Cash Flows |
| 1 | $1.30 |
| 2 | $1.50 |
| 3 | $1.75 |
| 4 | $2.00 |
| 5 and beyond | Constant growth at 5% |
These cash flows include all acquisition effects. Apilado's cost of equity is 14%, its beta is 1.0, and its cost of debt is 9%. The risk-free rate is 5%.
What discount rate should be used to discount the estimated cash flows? (Hint: Use Apilado's rs to determine the market risk premium.)
Round your answer to two decimal places.
%
What is the dollar value of Vaccaro to Apilado? Round your answer to two decimal places. Enter your answer in millions. For example, an answer of $13,000,000 should be entered as 13.
$ million
Vaccaro has 1.5 million common shares outstanding. What is the maximum price per share that Apilado should offer for Vaccaro? Round your answer to the nearest cent.
$
Related questions
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 | $499 | $568 | $599 | $630 | ||||||
| Selling and administrative expense | 48 | 54 | 63 | 71 | ||||||
| Interest | 18 | 21 | 24 | 27 | ||||||
| Tax rate after merger | 40% | |||||||||
| Cost of goods sold as a percent of sales | 80% | |||||||||
| Beta after merger | 1.65 | |||||||||
| Risk-free rate | 10% | |||||||||
| Market risk premium | 3% | |||||||||
| Continuing growth rate of cash flow available to TransWorld | 7% | |||||||||
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 40% if it were consolidated. GCC's current market-determined beta is 1.55, and its investment bankers think that its beta will rise to 1.65 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 10%, and the market risk premium is 3%. Do not round intermediate calculations.
What is the appropriate discount rate for valuing the acquisition?
% (to 2 decimals)
What is the continuing value?
$ thousand (to 1 decimal)
What is the value of GCC to TransWorld?
$ thousand (to 1 decimal)
