Merger Valuation with Synergies

Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $$2\mathrm{.}3$ million, $$2\mathrm{.}8$ million, $$3\mathrm{.}4$ million, and $$3\mathrm{.}74$ million at Years $1$ through $4,$

respectively, after which the free cash flows will grow at a constant $4\%$ rate. Hasting plans to assume Vandell's $$11\mathrm{.}52$ million in debt $($which has a $7\mathrm{.}3\%$ interest rate$)$ and raise additional debt

financing at the time of the acquisition. Hastings estimates that interest payments will be $$1\mathrm{.}6$ 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\mathrm{.}410$ million, after which the interest and the tax shield will grow at $4\%.$ Vandell currently has $1\mathrm{.}5$ million shares outstanding and a target capital structure

consisting of $30\%$ debt; its current beta is $1\mathrm{.}10($i$.$e$.,$ based on its target capital structure$).$ Vandell and Hastings each have a $30\%$ combined federal$-$plus$-$state tax rate. The risk$-$free rate is $7\%$ and the

market risk premium is $4\%.$

a$.$ What is Vandell's pre$-$acquisition levered cost of equity? What is its unlevered cost of equity? Do not round intermediate calculations. Round your answers to two decimal places.

Pre$-$acquisition levered cost of equity:

$\%$

Unlevered cost of equity:

$\%$

b$.$ What is the intrinsic unlevered value of operations at $t=0($assuming the synergies are realized$)?$ Enter your answer in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$

not $1,230,000.$ Do not round intermediate calculations. Round your answer to the nearest cent.

$

million

c$.$ What is the value of the tax shields at $t=0?$ Enter your answer in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$ not $1,230,000.$ Do not round intermediate

calculations. Round your answer to two decimal places.

$

million

d$.$ What is the total intrinsic value at $t=0?$ What is the intrinsic value of Vandell's equity to Hasting? What is the maximum price per share that Hasting's should offer Vandell's shareholders? Enter

your answers for the value of operations and the equity value to acquirer in millions. For example, an answer of $$1\mathrm{.}23$ million should be entered as $1\mathrm{.}23,$ not $1,230,000.$ Do not round intermediate

calculations. Round your answers to two decimal places.

Total intrinsic value: $

million

Equity value to acquirer: $

million

Maximum price: $

per share