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Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Vandell's debt Interest rate is 7.5%. Assume that the risk-free rate of

Interest Is 7% and the market nsk premium is 8%. Both Vandell and Hastings face a 35% tax rate

Vandell's beta is 1.30. Hastings estimates that If it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. The free cash flows are supposed to be $2.4 million, $3.1 million, $3.3 million, and then $3.63 million in

Years 1 through 4, respectively. Suppose Hastings will Increase Vandell's level of debt at the end of Year 3 to $34.1 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest

rate would be 8.0%, and assume that interest pavments in Year 4 are based on the new debt level from the end of Year 3 and new interest rate. Free cash flows and tax shields are prolected to arow at 5% after Year 4

The data has hen collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analvsis to answer the questions below.

Stuvenire Merger Valuation with Change in Copital Structure \begin{tabular}{|c|c|} \hline Dobt & 30.00% \\ \hline Equily & 70.004 \\ \hline Number of common shares outstanding & 1,000,000 \\ \hline Current debt amount & $9.570.000 \\ \hline Debt interest rate & 7.50% \\ \hline Risk-free rate & 7.00% \\ \hline Market risk premium & 800% \\ \hline Taxrate & 3500% \\ \hline Bota & 130 \\ \hline Interest payments, Years 1 - 3 & 51,600,000 \\ \hline Growth rate & 500% \\ \hline Free cosh flow, Year 1 & 32,400,000 \\ \hline Free cash fow, Year 2 & $3,100,000 \\ \hline Free cash flow, Year 3 & $3,300,000 \\ \hline Eree cash fow Year 4 & $3,630,000 \\ \hline Level of dobt, Year 3 & 54,100,000 \\ \hline New interest rate at higher debtlevel & 800x \\ \hline New targot capital structure: & \\ \hline Dabt & 45005 \\ \hline Equity. & ss.006s. \\ \hline \end{tabular} Calculate target firm's levered cost of equity ifs Calculate turpet firm's unlovered cost of equity ifs Cifeutate target firm's unlovered value: Unlevernd horizon value of FCF Untevorod value of operitions Cifcufate vitio of finterest tax shields: Tax shield, Your 1 Tax ohield, Yoar 2 Tax shiald, Yoar 3 Taxiheld, Hocizon valun Valoe of tax ahinlds Value of operitions Targut forms equiry valve is acquiring firm Per thate valien io acquiring firm

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