Problem #$1$

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 $1\mathrm{.}4($given its target capital structure$).$ Vandell has $$10\mathrm{.}82$ million in debt that trades at par and pays an $8\%$ interest rate. Vandell$$s free cash flow FCF$0$ is $$2$ million per year and is expected to grow at a constant rate of $5\%$ a year. Vandell pays a $40\%$ combined federal and state tax rate. The risk$-$free rate of interest is $5\%$ and the market risk premium is $6\%.$ Hastings$$s first step is to estimate the current intrinsic value of Vandell.

What are Vandell$$s cost of equity and weighted average cost of capital?

What is Vandell$$s intrinsic value of operations? $($Hint: Use the free cash flow corporate valuation model from Chapter $7.)$

What is the current intrinsic value of Vandell$$s stock

Problem #$2$

Neubert Enterprises recently issued $$1,000$ par value $15-$year bonds with a $5\%$ coupon paid annually and warrants attached. These bonds are currently trading for $$1,000.$ Neubert also has outstanding $$1,000$ par value $15-$year straight debt with a $7\%$ coupon paid annually, also trading for $$1,000.$ What is the implied value of the warrants attached to each bond?

Problem #$3$

An unlevered firm has a value of $$800$ million. An otherwise identical but levered firm has $$60$ million in debt at a $5\%$ interest rate. Its cost of debt is $5\%$ and its unlevered cost of equity is $11\%.$ After Year $1,$ free cash flows and tax savings are expected to grow at a constant rate of $3\%.$ Assuming the corporate tax rate is $35\%,$ use the compressed adjusted present value model to determine the value of the levered firm. $($Hint: The interest expense at Year $1$ is based on the current level of debt.$)$