Merger Valuation with Change in Capital Structure

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.10 (given its target capital structure). Vandell's debt interest rate is 7.1%. Assume that the risk-free rate of interest is 5% and the market risk premium is 5%. Both Vandell and Hastings face a 30% tax rate.

Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $35.0 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 9.0%, and assume that interest payments in Year 4 are based on the new debt level from the end of Year 3 and new interest rate. Again, free cash flows and tax shields are projected to grow at 6% after Year 4.

What is the value of the unlevered firm? Enter your answer in millions.

What is the value of the tax shield?

What is the maximum price that Hastings would bid for Vandell now?