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 6% and the market risk premium is 8%. Both Vandell and Hastings face a 40% tax rate. Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 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 $1.423 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.3 million, $3.1 million, $3.3 million, and then $3.60 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% 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 unlèvered 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. 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. What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $9.06 million in debt. Do not round intermediate calculations. Round your answer to the nearest cent. $ per share

Financial Management: Theory & Practice
16th Edition
ISBN:9781337909730
Author:Brigham
Publisher:Brigham
Chapter22: Mergers And Corporate Control
Section: Chapter Questions
Problem 5P
Question
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 6% and the market risk premium is 8%. Both Vandell and Hastings face a 40% tax rate.
Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 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 $1.423 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be
$2.3 million, $3.1 million, $3.3 million, and then $3.60 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% 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 unlèvered 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.
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.
What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $9.06 million in debt. Do not round intermediate calculations. Round your
answer to the nearest cent.
$
per share
Transcribed Image Text: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 6% and the market risk premium is 8%. Both Vandell and Hastings face a 40% tax rate. Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 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 $1.423 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.3 million, $3.1 million, $3.3 million, and then $3.60 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% 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 unlèvered 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. 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. What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $9.06 million in debt. Do not round intermediate calculations. Round your answer to the nearest cent. $ per share
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