Financial Management: Theory & Practice
Financial Management: Theory & Practice
16th Edition
ISBN: 9780357296776
Author: Eugene F. Brigham, Michael C. Ehrhardt
Publisher: Cengage Learning US
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Chapter 22, Problem 4P

Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.19 million in debt that trades at par and pays an 8% interest rate. Vandell’s current free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell.

  1. a. What is Vandell’s cost of equity?
  2. b. What is its weighted average cost of capital?
  3. c. What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.)
  4. d. Based on this analysis, what is the minimum stock price that Vandell’s shareholders should accept?
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