5-4 Merger Valuation with Change in Capital Structure Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 through 4, respec- tively, after which the free cash flows will grow at a constant 5% rate. Hasting plans to assume Vandell's $10.82 million in debt and raise addi- tional debt financing at the time of the acquisition. Hasting estimates that interest payments will be $1.5 million each year for Years 1, 2, and 3. Unlike Problem 26-3, suppose Hasting will increase Vandell's level of debt at Year 3 to $30.6 million so that the target capital structure becomes 45% debt. Assume that with this higher level of debt the interest rate would be 8.5%, and assume that interest payments in Year 4 are based on the new debt level at Year 3 and the 8.5% interest rate. The Year 4 interest expense is expected to grow at 5% after Year 4. As described in Problem 26-1, Vandell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.4 (i.e., based on its target capital structure). a. What is the Year 4 interest expense? What is the Year 4 tax shield? b. What is the unlevered value of operations? What is the value of the tax shield? (Hint: You can use the pre-acquisition unlevered cost of equity you determined previously if you worked Problem 26-2; you can also use the unlevered value of operations you determined previously if you worked Problem 26-2.) c. What is the maximum price per share that Hasting would bid for Vandell? How does it compare with your answers to Problems 26-1 and 26-27