Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Intrinsic Value of Merger target Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting

image text in transcribed

Intrinsic Value of Merger target Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Vandell has $10.28 million in debt that trades at par and pays a 7.9% interest rate. Vandell's free cash flow (FCF) is $2 million per year and is expected to grow at a constant rate of 4% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk- free rate of interest is 4%, and the market risk premium is 6%. Hasting's first step is to estimate the current intrinsic value of Vandell. a. What is Vandell's cost of equity? Do not round intermediate calculations. Round your answer to two decimal places. 11.70 % b. What is its weighted average cost of capital? Do not round intermediate calculations. Round your answer to two decimal places. 9.85 % C. What is Vandell's intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model.) Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answer to two decimal places. $ 2.22 million d. Based on this analysis, what is the minimum stock price that Vandell's shareholders should accept? Do not round intermediate calculations. Round your answer to the nearest cent. $ 8.06 / share

Step by Step Solution

There are 3 Steps involved in it

Step: 1

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 For Technology Start Ups

Authors: Alnoor Bhimani

2nd Edition

1398603082, 978-1398603080

More Books

Students also viewed these Finance questions

Question

What is human nature?

Answered: 1 week ago