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 postmerger data for GCC (in thousands of dollars, with a December 31 year-end): 2002 2003 2004
Net Sales $450 $518 $555
Selling and administrative expense $45 $53 $60
Interest $18 $21 $24
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%
Terminal growth rate of cash flow available to TransWorld's shareholders
7%
If the acquisition is made, it will occur on January 1, 2002. 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 percent debt, but TransWorld would increase that to 50 percent if the acquisition is made. GCC, if independent, would pay taxes at 20 percent, but its income would be taxed at 35 percent 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 percent. The cost of goods sold is expected to be 65 percent 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 percent, and the market risk premium is 4 percent.
Suppose GCC has 120,000 shares outsatnding. What is the maximum per-share price TransWorld should offer for GCC?
