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Problem 21-6 "TUTOR WILL YOU PLEASE PLACE ANSWER ON A EXCEL SPREAD SHEET, ALSO ATTACHED IS A WORD DOCUMENT TO MAKE THE PROBLEM CLEARER THANK YOU Merger Valuation with Change in Capital Structure VolWorld Communications Inc., a large telecommunications company, is evaluating the possible acquisition of Bulldog Cable Company (BCC), a regional cable company. VolWorld's analysts project the following post-merger data for BCC (in thousands of dollars, with a December 31): 2010 2011 2012 2013 2014 2015 Net sales $450.0 $518.0 $555.0 $600.0 $643.0 Selling and administrative expense 45.0 53.0 60.0 68.0 73.0 Interest 40.0 45.0 47.0 52.0 54.0 Total net operating capital 800.0 850.0 930.0 1,005.0 1,075.0 1,150.0 Tax rate after merger: 40% Cost of goods sold as a percent of sales: 50% BCC's pre-merger beta: 1.10 Risk-free rate: 5% Market risk premium: 7% Terminal growth rate of free cash flows: 6% If the acquisition is made, it will occur on January 1, 2011. All cash flows shown in the income statements are assumed to occur at the end of the year. BCC currently has a capital structure of 40% debt, which costs 8.50%, but over the next four years VolWorld would increase that to 50%, and the target capital structure would be reached by the start of 2015. BCC, if independent, would pay taxes at 20%, but its income would be taxed at 40% if it were consolidated. BCC's current market-determined beta is 1.10. The cost of goods sold is expected to be 50% of sales. What is the unlevered cost of equity for BCC? Round your answer to two decimal places. %

 

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