Question
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
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 |
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Discovering Advanced Algebra An Investigative Approach
Authors: Jerald Murdock, Ellen Kamischke, Eric Kamischke
1st edition
1559539844, 978-1604400069, 1604400064, 978-1559539845
