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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
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 7% and the market nsk premium is 8%. Both Vandell and Hastings face a 35% tax rate
Vandell's beta is 1.30. 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 $3.63 million in
Years 1 through 4, respectively. Suppose Hastings will Increase Vandell's level of debt at the end of Year 3 to $34.1 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 pavments 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 prolected to arow at 5% after Year 4
The data has hen collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analvsis to answer the questions below.
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