Merger Valuation with Synergies

Hastings Corporation is interested in acquiring Vandell Corporation. Hastings Corporation 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 $3.68 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 4% rate. Hastings plans to assume Vandells $11.08 million in debt (which has a 7.3% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 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 $1.468 million, after which the interest and the tax shield will grow at 4%. Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.10 (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 4% and the market risk premium is 7%.

1. What is Vandells 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: %

2. 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 $1.23 million should be entered as 1.23, not 1,230,000. Do not round intermediate calculations. Round your answer to the nearest cent.

   $ million