Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has 1 million shares outstanding and a...

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Hastings Corporation is interested in acquiring VandellCorporation. Vandell currently has 1 million shares outstanding anda target capital structure consisting of 30% debt; its current betais 1.10 (i.e., based on its target capital structure). Vandell'sdebt interest rate is 8%. Assume that the risk-free rate ofinterest is 7% and the market risk premium is 6%. Both Vandell andHastings face a 30% tax rate. Hastings Corporation estimates thatif it acquires Vandell Corporation, synergies will cause Vandell’sfree cash flows to be $2.3 million, $2.9 million, $3.4 million, and$3.56 million at Years 1 through 4, respectively, after which thefree cash flows will grow at a constant 6% rate. Hastings plans toassume Vandell’s $9.12 million in debt (which has an 8% interestrate) and raise additional debt financing at the time of theacquisition. Hastings estimates that interest payments will be $1.6million each year for Years 1, 2, and 3. After Year 3, a targetcapital structure of 30% debt will be maintained. Interest at Year4 will be $1.441 million, after which the interest and the taxshield will grow at 6%.
a. What is Vandell’s pre-acquisition levered cost of equity?What is its unlevered cost of equity? Round your answer to twodecimal places. Do not round intermediate calculations.
Pre-acquisition levered cost of equity= %
Unlevered cost of equity = _%
b. What is the intrinsic unlevered value of operations at t = 0(assuming the synergies are realized)? Round your answer to thenearest cent. Do not round intermediate calculations.
c. What is the value of the tax shields at t = 0? Round youranswer to two decimal places. Do not round intermediatecalculations.
d. What is the total intrinsic value of operations at t = 0?What is the intrinsic value of Vandell’s equity to Hastings? Whatis Vandell’s intrinsic stock price per share? Round your answer totwo decimal places. Do not round intermediate calculations.
Value of operations: $
million
Equity value to acquirer: $
million
Intrinsic value per share of existing shares to acquirer: $
/share

Answer & Explanation Solved by verified expert

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SolutionPart A Risk free rate 7 beta 11 Risk premium 6Cost of equity levered Rf beta levered Riskpremium 7 11 6 136Beta See Answer

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Hastings Corporation is interested in acquiring VandellCorporation. Vandell currently has 1 million shares outstanding anda target capital structure consisting of 30% debt; its current betais 1.10 (i.e., based on its target capital structure). Vandell'sdebt interest rate is 8%. Assume that the risk-free rate ofinterest is 7% and the market risk premium is 6%. Both Vandell andHastings face a 30% tax rate. Hastings Corporation estimates thatif it acquires Vandell Corporation, synergies will cause Vandell’sfree cash flows to be $2.3 million, $2.9 million, $3.4 million, and$3.56 million at Years 1 through 4, respectively, after which thefree cash flows will grow at a constant 6% rate. Hastings plans toassume Vandell’s $9.12 million in debt (which has an 8% interestrate) and raise additional debt financing at the time of theacquisition. Hastings estimates that interest payments will be $1.6million each year for Years 1, 2, and 3. After Year 3, a targetcapital structure of 30% debt will be maintained. Interest at Year4 will be $1.441 million, after which the interest and the taxshield will grow at 6%.a. What is Vandell’s pre-acquisition levered cost of equity?What is its unlevered cost of equity? Round your answer to twodecimal places. Do not round intermediate calculations.Pre-acquisition levered cost of equity= ____%Unlevered cost of equity = _____%b. What is the intrinsic unlevered value of operations at t = 0(assuming the synergies are realized)? Round your answer to thenearest cent. Do not round intermediate calculations.c. What is the value of the tax shields at t = 0? Round youranswer to two decimal places. Do not round intermediatecalculations.d. What is the total intrinsic value of operations at t = 0?What is the intrinsic value of Vandell’s equity to Hastings? Whatis Vandell’s intrinsic stock price per share? Round your answer totwo decimal places. Do not round intermediate calculations.Value of operations: $millionEquity value to acquirer: $millionIntrinsic value per share of existing shares to acquirer: $/share