Question
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has a cost of equity of 10%; 25% of its financing is in the form
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has a cost of equity of 10%; 25% of its financing is in the form of 6% debt, and the rest is in common equity. Its federal-plus-state tax rate is 40%. After the acquisition, Hastings expects Vandell to have the following FCFs and interest payments for the next three years (in millions):
Year1 | Year 2 | Year 3 | |
FCF | $10 | $20 | $22 |
Interest expense | 28 | 24 | 20.28 |
After this, the free cash flows are expected to grow at a constant rate of 5.4%, and the capital structure will stabilize at 35% debt with an interest rate of 7%. What is the horizon value, in millions, of unlevered operations?
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