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

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Hastings Corporation is interested in acquiring VandellCorporation. Vandell has 1 million shares outstanding and a targetcapital structure consisting of 30% debt; its beta is 1.45 (givenits target capital structure). Vandell has $8.75 million in debtthat trades at par and pays an 7.7% interest rate. Vandell’s freecash flow (FCF₀) is $2 million per year and is expectedto grow at a constant rate of 5% a year. Vandell pays a 40%combined federal and state tax rate. The risk-free rate of interestis 5% and the market risk premium is 6%. Hastings’ first step is toestimate the current intrinsic value of Vandell.
What are Vandell’s cost of equity and weighted average cost ofcapital? Round your answer to two decimal places. Do not roundintermediate calculations.
Cost of equity:  %
WACC:  %
What is Vandell's intrinsic value of operations? (Hint:Use the free cash flow corporate valuation model.) Round youranswer to two decimal places. Do not round intermediatecalculations.
$    million
What is the current intrinsic value of Vandell's stock? Roundyour answer to the nearest cent. Do not round intermediatecalculations.
$   /share

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4.5 Ratings (833 Votes)

Solution a Cost of equity 1370 WACC 1098 Working Notes Using CAPM Cost of equity riskfree rate risk premium x Beta Risk free rate rf 5 Market risk premium 6 Beta 145 Cost of equity riskfree rate risk premium x Beta 5 6 x 145 5 87 1370 WACC EV See Answer

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Hastings Corporation is interested in acquiring VandellCorporation. Vandell has 1 million shares outstanding and a targetcapital structure consisting of 30% debt; its beta is 1.45 (givenits target capital structure). Vandell has $8.75 million in debtthat trades at par and pays an 7.7% interest rate. Vandell’s freecash flow (FCF0) is $2 million per year and is expectedto grow at a constant rate of 5% a year. Vandell pays a 40%combined federal and state tax rate. The risk-free rate of interestis 5% and the market risk premium is 6%. Hastings’ first step is toestimate the current intrinsic value of Vandell.What are Vandell’s cost of equity and weighted average cost ofcapital? Round your answer to two decimal places. Do not roundintermediate calculations.Cost of equity: %WACC: %What is Vandell's intrinsic value of operations? (Hint:Use the free cash flow corporate valuation model.) Round youranswer to two decimal places. Do not round intermediatecalculations.$ millionWhat is the current intrinsic value of Vandell's stock? Roundyour answer to the nearest cent. Do not round intermediatecalculations.$ /share