Hastings Corporations estimates that if it acquires Vandell Corporation, synergies will cause Vandells free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 through 4, respectively, after which the free cash flows will go at a constant 5% rate. Hastings plans to assume Vandells $10.82 million in debt (which has an 8% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.5 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.472 million, after which the interest and the tax shield will grow at 5%. As described in Problem 22-1, Vandell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.4 (i.e, based on its target capital structure).

a. What is Vandells pre-acquisition levered cost of equity? What is its unlevered cost of equity?

b. What is the intrinsic unlevered value of operations at t=0 (assuming the synergies are realized)?

c. What is the value of tax shields at t=0?

d. What is the total intrinsic value of operations at t=0? What is the intrinsic value of Vandells equity to Hastings? What is Vandells intrinsic stock price per share?

e. On the basis of you answers to Problem 22-1 and Problem 22 -1, indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition.

Data from Problem 22-1

Debt in capital structure	30%
Debt interest rate	8%
Risk Free Rate	5%
Market Risk Premuium	6%
Tax Rate	40%
FCFO(Free Cash Flow at year 0)	$2,000,000.00
Expected growth rate	5%
Beta	1.40
Value of Debt	$10,820,000.00
Shares Outstanding	1,000,000
Cost of Equity	13.40%
After-tax cost of debt	4.80%
WACC (Weighted Average Cost of Debt)	10.82%
Value of Operation	$36,082,474.23
Value of Equity	$25,262,474.23
Current Share Price	$25.26
Debt in capital structure	30%
Debt interest rate	8%
Risk Free Rate	5%
Market Risk Premuium	6%
Tax Rate	40%
FCFO(Free Cash Flow at year 0)	$2,000,000.00
Expected growth rate	5%
Beta	1.40
Value of Debt	$10,820,000.00
Shares Outstanding	1,000,000
Cost of Equity	13.40%
After-tax cost of debt	4.80%
WACC (Weighted Average Cost of Debt)	10.82%
Value of Operation	$36,082,474.23
Value of Equity	$25,262,474.23
Current Share Price	$25.26