Topic 11

Mergers, LBOs, Divestitures, and Holding Companies

1. Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandelld debt interest rate is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Vandell and Hastings face a 40% tax rate. Vandells free cash flow (FCF₀) is $2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.4. What is the value of Vandells operation? If Vandell has $10.82 million in debt, what is the current value of Vandells stock?

Hint: The following formulas can be used to help you with your calculations:

(1) WACC = w_dr_d(1-T) + w_sr_s

(2) r_s = r_RF + RP_M()

(3) V_ops = FCF0(1+g)

(4) V_stock = V_ops debt

Topic 12

Derivatives and Risk Management

1. What is the implied interest rate on a Treasury bond ($100,000) futures contract that settled at 100-16? Assume that the contract relates to a 20-year, semiannual payment, 6 percent coupon rate. If interest rates increased by 1%, what would be the contracts new value?