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

50.1K

Verified Solution

Question

Finance

Hastings Corporation is interested in acquiring VandellCorporation. Vandell has 1 million shares outstanding and a targetcapital structure consisting of 30% debt; its beta is 1.35 (givenits target capital structure). Vandell has $11.22 million in debtthat trades at par and pays an 7.9% interest rate. Vandell’s freecash flow (FCF₀) is $1 million per year and is expectedto grow at a constant rate of 5% a year. Both Vandell and Hastingspay a 30% combined federal and state tax rate. The risk-free rateof interest is 5% and the market risk premium is 7%.
Hastings Corporation estimates that if it acquires VandellCorporation, synergies will cause Vandell’s free cash flows to be$2.6 million, $2.8 million, $3.5 million, and $3.90 million atYears 1 through 4, respectively, after which the free cash flowswill grow at a constant 5% rate. Hastings plans to assume Vandell’s$11.22 million in debt (which has an 7.9% interest rate) and raiseadditional debt financing at the time of the acquisition. Hastingsestimates that interest payments will be $1.5 million each year forYears 1, 2, and 3. After Year 3, a target capital structure of 30%debt will be maintained. Interest at Year 4 will be $1.459 million,after which the interest and the tax shield will grow at 5%.
Indicate the range of possible prices that Hastings could bidfor each share of Vandell common stock in an acquisition. Roundyour answers to the nearest cent. Do not round intermediatecalculations.
The bid for each share should range between $--------------- pershare and------------- $ per share.

Answer & Explanation Solved by verified expert

4.5 Ratings (994 Votes)

Step 1 Cost of equity ke riskfree rate betamarket risk premium 5 1357 1445 DebtTotal value DV 30 so EquityTotal value EV 1 DV 1 30 70 Cost of debt kd 79 same as interest rate since bond is selling at par Step 2 WACC DVkd1 tax rate EVke 3079130 701445 1177 Step 3 FCF0 1 million growth rate g 5 so Firm value V FCF01gWACC 1151177 1550 See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Hastings Corporation is interested in acquiring VandellCorporation. Vandell has 1 million shares outstanding and a targetcapital structure consisting of 30% debt; its beta is 1.35 (givenits target capital structure). Vandell has $11.22 million in debtthat trades at par and pays an 7.9% interest rate. Vandell’s freecash flow (FCF0) is $1 million per year and is expectedto grow at a constant rate of 5% a year. Both Vandell and Hastingspay a 30% combined federal and state tax rate. The risk-free rateof interest is 5% and the market risk premium is 7%.Hastings Corporation estimates that if it acquires VandellCorporation, synergies will cause Vandell’s free cash flows to be$2.6 million, $2.8 million, $3.5 million, and $3.90 million atYears 1 through 4, respectively, after which the free cash flowswill grow at a constant 5% rate. Hastings plans to assume Vandell’s$11.22 million in debt (which has an 7.9% interest rate) and raiseadditional debt financing at the time of the acquisition. Hastingsestimates that interest payments will be $1.5 million each year forYears 1, 2, and 3. After Year 3, a target capital structure of 30%debt will be maintained. Interest at Year 4 will be $1.459 million,after which the interest and the tax shield will grow at 5%.Indicate the range of possible prices that Hastings could bidfor each share of Vandell common stock in an acquisition. Roundyour answers to the nearest cent. Do not round intermediatecalculations.The bid for each share should range between $--------------- pershare and------------- $ per share.