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 year-end):

If the acquisition is made, it will occur on January 1, 2007. 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 percent debt, which costs 10 percent, but over the next four years VolWorld would increase that to 50 percent. The target capital structure will be reached by the start of 2011. BCC, if independent, would pay taxes at 20 percent, but its income would be taxed at 35 percent if it were consolidated. BCC's current market-determined beta is 1.40. The cost of goods sold is expected to be 65 percent of sales.

a. What is the unlevered cost of equity for BCC?

b. What are the free cash flows and interest tax shields for the first 5 years?

c. What is BCC's horizon value of interest tax shields and unlevered horizon value?

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