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 7.5%. Assume that the risk-free rate of interest is 3% and the market risk premium is 6%. Both Vandell and Hastings face a 35% tax rate. Vandell's beta is 1.25. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. The free cash flows are supposed to be $2.4 million, $3.1 million, $3.3 million, and then $3.98 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.5 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 6% 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. Merger Valuation with Change in Capital Structure Current target capital structure: \begin{tabular}{lr} \hline Debt & 30.00% \\ \hline Equity & 70.00% \\ \hline Number of common shares outstanding & 1,000,000 \\ \hline Current debt amount & $9,280,000 \\ \hline Debt interest rate & \\ \hline Risk-free rate & 7.50% \\ \hline Market risk premium & 3.00% \\ \hline Tax rate & 6.00% \\ \hline Beta & 35.00% \\ \hline Interest payments, Years 1-3 & 1.25 \\ \hline Growth rate & $1,600,000 \\ \hline Free cash flow, Year 1 & 6.00% \\ \hline Free cash flow, Year 2 & $2,400,000 \\ \hline Free cash flow, Year 3 & $3,100,000 \\ \hline Free cash flow, Year 4 & $3,300,000 \\ \hline \end{tabular} Calculate target firm's levered cost of equity \begin{tabular}{|c|c|} \hline & Formulas \\ \#N/A \\ \hline \end{tabular} Calculate target firm's unlevered cost of equity rsu 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 7.5%. Assume that the risk-free rate of interest is 3% and the market risk premium is 6%. Both Vandell and Hastings face a 35% tax rate. Vandell's beta is 1.25. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. The free cash flows are supposed to be $2.4 million, $3.1 million, $3.3 million, and then $3.98 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.5 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 6% 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. Merger Valuation with Change in Capital Structure Current target capital structure: \begin{tabular}{lr} \hline Debt & 30.00% \\ \hline Equity & 70.00% \\ \hline Number of common shares outstanding & 1,000,000 \\ \hline Current debt amount & $9,280,000 \\ \hline Debt interest rate & \\ \hline Risk-free rate & 7.50% \\ \hline Market risk premium & 3.00% \\ \hline Tax rate & 6.00% \\ \hline Beta & 35.00% \\ \hline Interest payments, Years 1-3 & 1.25 \\ \hline Growth rate & $1,600,000 \\ \hline Free cash flow, Year 1 & 6.00% \\ \hline Free cash flow, Year 2 & $2,400,000 \\ \hline Free cash flow, Year 3 & $3,100,000 \\ \hline Free cash flow, Year 4 & $3,300,000 \\ \hline \end{tabular} Calculate target firm's levered cost of equity \begin{tabular}{|c|c|} \hline & Formulas \\ \#N/A \\ \hline \end{tabular} Calculate target firm's unlevered cost of equity rsu
