Unlevered Cost of Equity

Elliott's Cross Country Transportation Services has a capital structure with 30% debt at an 8% interest rate. Its beta is 1.5, the risk-free rate is 3%, and the market risk premium is 9%. Elliott's combined federal-plus-state tax rate is 25%.

1. What is Elliott's cost of equity? Do not round intermediate calculations. Round your answer to two decimal places.
2. %
3. What is its weighted average cost of capital? Do not round intermediate calculations. Round your answer to two decimal places.
4. %
5. What is its unlevered cost of equity? Do not round intermediate calculations. Round your answer to two decimal places.
6. %

Unlevered Value

Richter Manufacturing has a 7% unlevered cost of equity. Richter forecasts the following free cash flows (FCFs), which are expected to grow at a constant 2% rate after Year 3.

1. Year 1Year 2Year 3FCF$715$745$800What is the horizon value of the unlevered operations? Do not round intermediate calculations. Round your answer to the nearest dollar.
2. $
3. What is the total value of unlevered operations at Year 0? Do not round intermediate calculations. Round your answer to the nearest dollar.
4. $

Intrinsic Value of Merger target

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.30 (given its target capital structure). Vandell has $10.85 million in debt that trades at par and pays a 7.5% interest rate. Vandell's free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 4% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 3%, and the market risk premium is 7%. Hasting's first step is to estimate the current intrinsic value of Vandell.

1. What is Vandell's cost of equity? Do not round intermediate calculations. Round your answer to two decimal places.
2. %
3. What is its weighted average cost of capital? Do not round intermediate calculations. Round your answer to two decimal places.
4. %
5. What is Vandell's intrinsic value of operations? (Hint:Use the free cash flow corporate valuation model.) 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 two decimal places.
6. $million
7. Based on this analysis, what is the minimum stock price that Vandell's shareholders should accept? Do not round intermediate calculations. Round your answer to the nearest cent.
8. $/ share