Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

Need help asap!! Excel Online Structured Activity: Merger Valuation with Change in Capital Structure Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1

Need help asap!! Excel Online Structured Activity: 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. Vandell's debt interest rate is 7%. Assume that the risk-free rate of interest is 3% and the market risk premium is 8%. Both Vandell and Hastings face a 40% tax rate.
Vandell's beta is 1.10. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. The free cash flows are supposed to be $2.4 million, $3.1 million, $3.3 million, and then $3.63 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $25.7 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.0%, 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. Free cash flows and tax shields are projected to grow at 5% after Year 4.
The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
Open spreadsheet
What is the value of the unlevered firm? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places.
$
What is the value of the tax shield? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places.
$
What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has $10.91 million in debt. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places.
$
image text in transcribed

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

Technical Analysis Of Stock Trends

Authors: Robert D. Edwards, John Magee, W.H.C. Bassetti

9th Edition

0814408648, 978-0814408643

More Books

Students also viewed these Finance questions

Question

Explain the purpose of ACLs filter capability.

Answered: 1 week ago

Question

Use the five-step decision process to make decisions

Answered: 1 week ago