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 7.2%. Assume that the risk-free rate of interest is 7% and the market risk premium is 7%. Both Vandell and Hastings face a 30% tax rate. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.443 million after which interest and the tax shield will grow at 4%. Synergies will cause the free cash flows to be $2.5 million, $2.8 million, $3.4 million, and then $3.98 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 4% rate. 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. X Open spreadsheet What is the unlevered value of Vandell? Vandell's beta is 1.10. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. 2$ What is the value of its tax shields? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. 2$ What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $11.15 million in debt. Do not round intermediate calculations. Round your answer to the nearest cent. 2$ per share
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 7.2%. Assume that the risk-free rate of interest is 7% and the market risk premium is 7%. Both Vandell and Hastings face a 30% tax rate. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.443 million after which interest and the tax shield will grow at 4%. Synergies will cause the free cash flows to be $2.5 million, $2.8 million, $3.4 million, and then $3.98 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 4% rate. 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. X Open spreadsheet What is the unlevered value of Vandell? Vandell's beta is 1.10. Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. 2$ What is the value of its tax shields? Enter your answer in dollars. For example, an answer of $1.2 million should be entered as 1,200,000, not 1.2. Do not round intermediate calculations. Round your answer to two decimal places. 2$ What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $11.15 million in debt. Do not round intermediate calculations. Round your answer to the nearest cent. 2$ per share
Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter22: Mergers And Corporate Control
Section: Chapter Questions
Problem 5P
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