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 7.6%. Assume that the risk-free rate of interest is 6% and the market risk premium is 4%. Both Vandell and Hastings face a 30% tax rate. Vandell's beta is 1.35. 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 $2.3 million, $2.8 million, $3.3 million, and then $3.70 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.2 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.5%, and assume that interest payments 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 projected to grow at 6% after Year 4. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. What is the value of the unlevered firm? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. $ fill in the blank What is the value of the tax shield? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. $ fill in the blank What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has $8.52 million in debt. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. $ fill in the blank Merger Valuation with Change in Capital Structure Current target capital structure: Debt 30.00% Equity 70.00% Number of common shares outstanding 1,000,000 Current debt amount $8,520,000 Debt interest rate 7.60% Risk-free rate 6.00% Market risk premium 4.00% Tax rate 30.00% Beta 1.35 Interest payments, Years 1 - 3 $1,600,000 Growth rate 6.00% Free cash flow, Year 1 $2,300,000 Free cash flow, Year 2 $2,800,000 Free cash flow, Year 3 $3,300,000 Free cash flow, Year 4 $3,700,000 Level of debt, Year 3 $34,200,000 New interest rate at higher debt level 8.50% New target capital structure: Debt 45.00% Equity 55.00% Calculate target firm's levered cost of equity rsL Calculate target firm's unlevered cost of equity rsU Calculate target firm's unlevered value: Unlevered horizon value of FCF Unlevered value of operations Calculate value of interest tax shields: Tax shield, Year 1 Tax shield, Year 2 Tax shield, Year 3 Tax shield, Year 4 Tax shield, Horizon value Value of tax shields
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 7.6%. Assume that the risk-free rate of interest is 6% and the market risk premium is 4%. Both Vandell and Hastings face a 30% tax rate.
Vandell's beta is 1.35. 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 $2.3 million, $2.8 million, $3.3 million, and then $3.70 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.2 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.5%, and assume that interest payments 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 projected to grow at 6% after Year 4.
The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below.
What is the value of the unlevered firm? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places.
$ fill in the blank
What is the value of the tax shield? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places.
$ fill in the blank
What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has $8.52 million in debt. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places.
$ fill in the blank
Merger Valuation with Change in Capital Structure
Current target capital structure:
Debt
30.00%
Equity
70.00%
Number of common shares outstanding
1,000,000
Current debt amount
$8,520,000
Debt interest rate
7.60%
Risk-free rate
6.00%
Market risk premium
4.00%
Tax rate
30.00%
Beta
1.35
Interest payments, Years 1 - 3
$1,600,000
Growth rate
6.00%
$2,300,000
Free cash flow, Year 2
$2,800,000
Free cash flow, Year 3
$3,300,000
Free cash flow, Year 4
$3,700,000
Level of debt, Year 3
$34,200,000
New interest rate at higher debt level
8.50%
New target capital structure:
Debt
45.00%
Equity
55.00%
Calculate target firm's levered
rsL
Calculate target firm's unlevered cost of equity
rsU
Calculate target firm's unlevered value:
Unlevered horizon value of FCF
Unlevered value of operations
Calculate value of interest tax shields:
Tax shield, Year 1
Tax shield, Year 2
Tax shield, Year 3
Tax shield, Year 4
Tax shield, Horizon value
Value of tax shields
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