Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

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 7.7%. Assume that the risk-free rate of interest is 6% and the market risk premium is 7%. Both Vandell and Hastings face a 30% tax rate.

Vandell's free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 6% a year; its beta is 1.25.

Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.412 million after which interest and the tax shield will grow at 6%. Synergies will cause the free cash flows to be $2.4 million, $2.7 million, $3.4 million, and then $3.56 million, after which the free cash flows will grow at a 6% rate.

Assume Vandell now has $11.72 million in debt.

Indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition.

The bid for each share should range between $ _ _ _ _ _ per share and $ _ _ _ _ per share.

Step by Step Solution

3.40 Rating (163 Votes )

There are 3 Steps involved in it

Step: 1

The bid for each share should range between 3280 per share and 3760 per share Explanation The NPV of ... blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Financial Management Concepts and Applications

Authors: Stephen Foerster

1st edition

013293664X, 978-0132936644

More Books

Students also viewed these Accounting questions

Question

What factors determine the minimum bend radius for a material?

Answered: 1 week ago

Question

Compute Paasches index for 2013 using 2000 as the baseperiod.

Answered: 1 week ago