1.Merger Valuation

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 7.4%. Assume that the risk-free rate of interest is 4% and the market risk premium is 7%. Both Vandell and Hastings face a 35% tax rate.

Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.436 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.3 million, $3.2 million, $3.5 million, and then $3.92 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate.

a.What is the unlevered value of Vandell? Vandell's beta is 1.10. Round your answer to two decimal places. Do not round intermediate calculations. $ million

b. What is the value of its tax shields? Enter your answer in millions. Round your answer to two decimal places. Do not round intermediate calculations. $ million

c. What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $9.94 million in debt. $ per share

2. Merger Bid

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt interest rate is 7.4%. Assume that the risk-free rate of interest is 7% and the market risk premium is 4%. Both Vandell and Hastings face a 30% tax rate.

Vandell's free cash flow (FCF₀) is $1 million per year and is expected to grow at a constant rate of 4% a year; its beta is 1.30.

Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.473 million after which interest and the tax shield will grow at 4%. Synergies will cause the free cash flows to be $2.3 million, $3.0 million, $3.4 million, and then $3.69 million, after which the free cash flows will grow at a 4% rate. Assume Vandell now has $8.07 million in debt.

Indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Round your answers to the nearest cent. Do not round intermediate calculations.

The bid for each share should range between $ ? per share and $ ? per share.

3. Merger Valuation with Change in Capital Structure

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Vandell's debt interest rate is 7.9%. Assume that the risk-free rate of interest is 5% and the market risk premium is 5%. Both Vandell and Hastings face a 35% tax rate.

Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $33.2 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 9.0%, and assume that interest payments in Year 4 are based on the new debt level from the end of Year 3 and new interest rate. Again, free cash flows and tax shields are projected to grow at 6% after Year 4.

a. What is the value of the unlevered firm? Enter your answer in millions. Round your answer to two decimal places. Do not round intermediate calculations. $ million

b. What is the value of the tax shield? Enter your answer in millions. Round your answer to two decimal places. Do not round intermediate calculations. $ million

c. What is the maximum price that Hastings would bid for Vandell now? Enter your answer in millions. Round your answer to two decimal places. Do not round intermediate calculations. $ million