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 is1.35(given itstarget capital structure). Vandell has $9.85million in debt thattrades at par and pays an 7.1% interest rate. Vandell’s free cashflow (FCF0) is $1million per year and is expected to grow at aconstant rate of 4% a year. Both Vandell and Hastings pay a 40%combined federal and state tax rate. The risk-free rate of interestis5% and the market risk premium is4%. Hastings Corporationestimates that if it acquires Vandell Corporation, synergies willcause Vandell’s free cash flows to be $2.6million, $2.8million,$3.3million, and $3.71million at Years 1 through 4, respectively,after which the free cash flows will grow at a constant 4% rate.Hastings plans to assume Vandell’s $9.85million in debt (which hasan 7.1% interest rate) and raise additional debt financing at thetime of the acquisition. Hastings estimates that interest paymentswill be $1.6million each year for Years 1, 2, and 3. After Year 3,a target capital structure of 30% debt will be maintained. Interestat Year 4 will be $1.416million, after which the interest and thetax shield will grow at 4%.
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 $ per shareand $ _per share.

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4.0 Ratings (501 Votes)

First we need to calculate the discount rateie WACC to discount the free cash flows WACCWtEquityCost EquityWtDebtCost Debt AS per CAPM Cost of Equity Ke RFRbetaMktrisk premium Ke51354 104 Aftertax cost of debtBeforetax cost1Tax rate ie 71140 426 Given the Wtof debt 30 Wt of equity13070 WACC7010430426 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 is1.35(given itstarget capital structure). Vandell has $9.85million in debt thattrades at par and pays an 7.1% interest rate. Vandell’s free cashflow (FCF0) is $1million per year and is expected to grow at aconstant rate of 4% a year. Both Vandell and Hastings pay a 40%combined federal and state tax rate. The risk-free rate of interestis5% and the market risk premium is4%. Hastings Corporationestimates that if it acquires Vandell Corporation, synergies willcause Vandell’s free cash flows to be $2.6million, $2.8million,$3.3million, and $3.71million at Years 1 through 4, respectively,after which the free cash flows will grow at a constant 4% rate.Hastings plans to assume Vandell’s $9.85million in debt (which hasan 7.1% interest rate) and raise additional debt financing at thetime of the acquisition. Hastings estimates that interest paymentswill be $1.6million each year for Years 1, 2, and 3. After Year 3,a target capital structure of 30% debt will be maintained. Interestat Year 4 will be $1.416million, after which the interest and thetax shield will grow at 4%.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 $ ________per shareand $ _________per share.