FM11_Ch_25_P07_Build_a_Model

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8/5/2003 Chapter 25. 25-07 Build a Model 2005 2006 2007 2008 Net sales $500 $600 $700 $760 Selling and administrative expense 60 70 80 90 Interest 20 23 25 28 Tax rate of ACC before the merger 30% Tax rate after merger 35% Cost of goods sold as a % of sales 65% Debt ratio (percent financed with debt) before the merger 30% Cost of debt before merger 9% Debt ratio (percent financed with debt) after the merger 40% Cost of debt after merger 10% Beta of ACC 1.40 Risk-free rate 7% Market risk premium 6.5% Terminal growth rate of free cash flow 6.0% Pre-merger debt (in thousands) $200 a. What is the appropriate discount rate for valuing the acquisition? Step 1: Find the levered cost of equity at old capital structure. Step 2: Find the unlevered cost of equity. Step 3: Find the levered cost of equity at the new capital structure Step 4: Find the WACC at the new capital structure. WACC = Wansley Portal Inc., a large Internet service provider, is evaluating the possible acquisition of Alabama Connections Company (ACC), a regional Internet service provider.
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