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 157% and the market risk premium is 6%. Both vandell and Hastings face a 40% tax rate. Vandell's beta is 1.20. 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 $2.5 miltion, $2.9 miltion, $3.3 million, and then $3.94 million in Years 1 through 4 , respectively, Suppose Hastings will increase Vandell's. level of debt at the end of Year 3 to $26.2 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 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 4% 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. 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 .00 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 calcuiations. Round your answer to two decimal places. $ What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has \$11.75 million in deot. Enter your answer in dollars. For example, an answer of $1.2 miliion should be entered as 1,200,000, not 1.2 . Do not round intermediate calculations, Round your answer to twa decimal places. Merger Valuation with Change in Capital Structure Current target capital structure: \begin{tabular}{|c|c|} \hline Debt & 30.00% \\ \hline Equily & 70.00% \\ \hline Number of common shares outstanding & 1,000,000 \\ \hline Current debt amount & $11,750,000 \\ \hline Debt interest rate & 7.90% \\ \hline Risk-free rate & 7.00% \\ \hline Market risk premium & 6.00% \\ \hline Tax rate & 40.00% \\ \hline Beta - & 1.20 \\ \hline Interest payments, Years 1 - 3 & $1,600,000 \\ \hline Growth rate & 4.00% \\ \hline Free cash flow, Year 1 & $2,500,000 \\ \hline Free cash flow, Year 2 & $2,900,000 \\ \hline Free cash flow, Year 3 & $3,300,000 \\ \hline Free cash flow, Year 4 & $3,940,000 \\ \hline & \\ \hline Level of debt, Year 3 & $26,200,000 \\ \hline New interest rate at higher debt level & 8.00% \\ \hline New target capital structure: & \\ \hline Debt & 45.00% \\ \hline 5. Equity & 55.00% \\ \hline \end{tabular} Calculate target firm's levered cost of equily ra \begin{tabular}{|c|c|c|} \hline Formulas \\ \hline UNA \\ \hline \end{tabular} Calculate target firm's unlevered cost of equily rou Calculate target finm's unlevered value: Unlevered horizon value of FCF Unlevered value of operations Calculate value of interest tax shiolds: Tax. shield, Year 1 Tax shleld, Year 2 Tax shield, Year 3 Tax shelel, Year 4 Tax shield, Horizon value Value of tax shields Calculate target fim's per share value to ecpuling fim: Value of operations Target firm's equity value to acquiring firm Per share value to acquiring firm
