Merger Bid Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding...

50.1K

Verified Solution

Question

Finance

Merger Bid Hastings Corporation is interested in acquiringVandell Corporation. Vandell has 1 million shares outstanding and atarget capital structure consisting of 30% debt; its beta is 1.60(given its target capital structure). Vandell has $11.84 million indebt that trades at par and pays an 7.3% interest rate. Vandell’sfree cash flow (FCF0) is $1 million per year and is expected togrow at a constant rate of 6% a year. Both Vandell and Hastings paya 40% combined federal and state tax rate. The risk-free rate ofinterest is 7% and the market risk premium is 5%.
Hastings Corporation estimates that if it acquires VandellCorporation, synergies will cause Vandell’s free cash flows to be$2.6 million, $2.7 million, $3.3 million, and $3.98 million atYears 1 through 4, respectively, after which the free cash flowswill grow at a constant 6% rate. Hastings plans to assume Vandell’s$11.84 million in debt (which has an 7.3% interest rate) and raiseadditional debt financing at the time of the acquisition. Hastingsestimates that interest payments will be $1.6 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 $1.472 million,after which the interest and the tax shield will grow at 6%.
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 share and $per share.

Answer & Explanation Solved by verified expert

4.0 Ratings (592 Votes)

1 Value of Vandell using the constant growth model DV 30 EV 70 Cost of debt 73 and tax rate 40 so aftertax cost of debt kd 73140 438 Cost of equity ke using CAPM riskfree rate betarisk premium 7 165 15 WACC kdDV keEV 43830 1570 1181 FCF0 1 million So value of the company FCF01gWACC g 1161181 6 1823 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

Merger Bid Hastings Corporation is interested in acquiringVandell Corporation. Vandell has 1 million shares outstanding and atarget capital structure consisting of 30% debt; its beta is 1.60(given its target capital structure). Vandell has $11.84 million indebt that trades at par and pays an 7.3% interest rate. Vandell’sfree cash flow (FCF0) is $1 million per year and is expected togrow at a constant rate of 6% a year. Both Vandell and Hastings paya 40% combined federal and state tax rate. The risk-free rate ofinterest is 7% and the market risk premium is 5%.Hastings Corporation estimates that if it acquires VandellCorporation, synergies will cause Vandell’s free cash flows to be$2.6 million, $2.7 million, $3.3 million, and $3.98 million atYears 1 through 4, respectively, after which the free cash flowswill grow at a constant 6% rate. Hastings plans to assume Vandell’s$11.84 million in debt (which has an 7.3% interest rate) and raiseadditional debt financing at the time of the acquisition. Hastingsestimates that interest payments will be $1.6 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 $1.472 million,after which the interest and the tax shield will grow at 6%.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 share and $per share.