Problem 22-2

Merger Valuation

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 7.5%. Assume that the risk-free rate of interest is 3% and the market risk premium is 6%. Both Vandell and Hastings face a 30% tax rate.

Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.402 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.3 million, $2.7 million, $3.5 million, and then $3.77 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. What is the unlevered value of Vandell? Vandell's beta is 1.60. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate calculations. $ million

What is the value of its tax shields? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate calculations. $ million

What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $8.18 million in debt. Round your answer to the nearest cent. Do not round intermediate calculations. $ per share