VolWorld Communications, Inc

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 $000s on Dec. 31):

                                         2010            2011            2012         2013          2014         2015

Net sales                                               450             518          555              600          643

G&A                                                       45                53           60                 68           73

Interest                                                   40               45            47                 52           54

Total net operating capital     800           850             930          1005            1075      1150              

Tax rate after merger: 35%

Cost of goods sold as a percentage of sales: 65%

BCC's pre-merger beta: 1.40

Risk-free rate: 6%

Market risk premium: 4%

Terminal growth rate of free cash flows and ITS: 7% after 2015

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 10%, but over the next 4 years VolWorld would increase that to 50%. The target capital structure would be reached at the start of 2015. BCC, if independent, would pay taxes at 20%, but its income would be taxed at 35% if it were consolidated. 

1)  What is the unlevered cost of equity for BCC?

2)  What are the free cash flows and interest tax shields for the first 5 years?

3)  What are BCC's horizon value of interest tax shield and unlevered horizon value?

4)   What is the value of BCC's equity to VolWorld's shareholders if BCC has $300,000 in debt outstanding now?