Excel Online Structured Activity: 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. Vandell's debt interest rate is 7.9%. Assume that the risk-free rate of interest is 4% and the market risk premium is 8%. Both Vandell and Hastings face a 40% tax rate. Vandell's beta is 1.35. Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years. The free cash flows are supposed to be $2.5 million, $2.7 million, $3.3 million, and then $3.63 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $26.1 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.0%, 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. Free cash flows and tax shields are projected to grow at 5% after Year 4. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. X Open.spreadsheet What is the value of the unlevered firm? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. What is the value of the tax shield? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round Intermediate calculations. Round your answer to two decimal places. What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has $10.43 million in debt. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. 828 A 1 Merger Valuation with Change in Capital Structure 2 3 Current target capital structure: 4 Debt 5 Equity 6 Number of common shares outstanding 7 Current debt amount 8 B 30.00% 70.00% 1,000,000 $10,430,000 9 Debt interest rate 7.90% 10 Risk-free rate 11 Market risk premium 12 Tax rate 13 Beta 4.00% 8.00% 40.00% 1.35 14 Interest payments, Years 1-31 $1,500,000 15 Growth rate 16 Free cash flow, Year 1 17 Free cash flow, Year 2 5.00% $2,500,000 $2,700,000 18 Free cash flow, Year 3 $3,300,000 19 Free cash flow, Year 4 $3,630,000 20 21 Level of debt, Year 3 $26,100,000 22 New interest rate at higher debt level 8.00% 23 New target capital structure: D E G 24 Debt 25 Equity 26 27 Calculate target firm's levered cost of equity 28 29 30 Calculate target firm's unlevered cost of equity 31 fo 32 33 Calculate target firm's unlevered value: 34 Unlevered horizon value of FCF 35 Unlevered value of operations 36 37 Calculate value of interest tax shields: 38 Tax shield, Year 1 39 Tax shield, Year 2 40 Tax shield, Year 3 41 Tax shield, Year 4 42 Tax shield, Horizon value 43 44 Value of tax shields 45 45.00% 55.00% Formulas ANIA #N/A WN/A #N/A #N/A #N/A #N/A #N/A #N/A #NIA 45 46 Calculate target firm's per share value to acquiring firm: 47 Value of operations 48 Target firm's equity value to acquiring firm 49 Per share value to acquiring firm 50 51 #N/A #N/A #N/A