Financial Management: Theory & Practice
16th Edition
ISBN: 9781337909730
Author: Brigham
Publisher: Cengage
expand_more
expand_more
format_list_bulleted
Videos
Textbook Question
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
- a. What is Vandell’s
cost of equity ? - b. What is its weighted average cost of capital?
- c. What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.)
- d. Based on this analysis, what is the minimum stock price that Vandell’s shareholders should accept?
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target
capital structure). Vandell has $11.22 million in debt that trades at par and pays a 7.2% interest rate. Vandell's free cash flow (FCF0) is $1 million per year and is expected to grow at a constant
rate of 5% a year. Both Vandell and Hastings pay a 30% combined federal and state tax rate. The risk-free rate of interest is 4% and the market risk premium is 6%.
Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.6 million, $2.9 million, $3.4 million, and $4.00 million at Years 1
through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell's $11.22 million in debt (which has a 7.2% interest rate) and raise
additional debt financing at the time of the…
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.60 (given its target capital structure). Vandell has $9.71 million in debt that trades at par and pays an 7.8% interest rate. Vandell’s free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Both Vandell and Hastings pay a 30% combined federal and state tax rate. The risk-free rate of interest is 4% and the market risk premium is 6%.
Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.6 million, $2.7 million, $3.3 million, and $3.71 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell’s $9.71 million in debt (which has an 7.8% interest rate) and raise additional debt financing at the time of the…
Hastings 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 1.60 (given its target capital structure). Vandell has $8.57 million in debt that trades at par and pays a 7.4% interest rate. Vandell’s free cash flow (FCF0) is $1 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 4%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell.
Chapter 22 Solutions
Financial Management: Theory & Practice
Ch. 22 - Prob. 1QCh. 22 - Prob. 2QCh. 22 - Prob. 3QCh. 22 - Prob. 4QCh. 22 - Prob. 5QCh. 22 - Prob. 1PCh. 22 - Prob. 2PCh. 22 - Prob. 3PCh. 22 - Hasting Corporation is interested in acquiring...Ch. 22 - Prob. 5P
Ch. 22 - Prob. 6PCh. 22 - Prob. 7SPCh. 22 - Prob. 1MCCh. 22 - Hager’s Home Repair Company, a regional hardware...Ch. 22 - Hager’s Home Repair Company, a regional hardware...Ch. 22 - Hager’s Home Repair Company, a regional hardware...Ch. 22 - Prob. 5MCCh. 22 - Prob. 6MCCh. 22 - Prob. 7MCCh. 22 - Prob. 8MCCh. 22 - Prob. 9MCCh. 22 - Prob. 10MCCh. 22 - Prob. 11MCCh. 22 - Prob. 12MC
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s 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 40% combined federal and state tax rate. The risk-free rate of interest is 5% and the market risk premium is 6%. Hastings’s first step is to estimate the current intrinsic value of Vandell. What are Vandell’s cost of equity and weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) What is the current intrinsic value of Vandell’s stockarrow_forwardHowell Corporation is interested in acquiring Burns Industries. Burns has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.55 (given its target capital structure). Burns has $8.33 million in debt that trades at par and pays a 7% interest rate. Burns’ free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 5% a year. Burns pays a 25% combined federal-plus-state tax rate, the same rate paid by Howell. The risk-free rate of interest is 6%, and the market risk premium is 7%. Hasting’s first step is to estimate the current intrinsic value of Burns. A. What is Burns’ cost of equity? Do not round intermediate calculations. Round to two decimal places. _______% B. What is its weighted average cost of capital? Do not round intermediate calculations. Round to two decimal places. ________% C. What is Burns’ intrinsic value of operations? Do not round intermediate calculations. Round to two decimal places.…arrow_forwardXYZ corporation is expecting free cash flow of $100 million next year, and it will grow by 3% per year indefinitely afterward. XYZ’s discount rate is 12%. XYZ has $300 million worth of long term bonds outstanding, and 10 million shares of stock outstanding. What is a fair value for a share of XYZ? Do not include the $ sign and answer to the nearest $0.01.arrow_forward
- National Corporation expects to generate free-cash flows of P300,000 per year for the next five years. Beyond that time, free cash flows are expected to grow at a constant rate of 5 percent per year forever. If the firm's average cost of capital is 15 percent, the market value of the firm's debt is P500,000, and National Corporation has a half million shares of stock outstanding, what is the value of National Corporation's stock? Format: 1.11arrow_forwardAn analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The analyst estimates that ATR Kim Eng's free cash flow during the next year will be P25 million. The analyst also estimates that the company's free cash flow will increase at a constant rate of 7% a year and that the company's WACC is 10%. ATR Kim Eng has P200 million of long-term debt and preferred stock and 30 million outstanding shares of common stock. What is the estimated per-share price of ATR Kim Eng's common stock? 27.78 21.11 8.33 34.43arrow_forwardAn analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The analyst estimates that ATR Kim Eng’s free cash flow during the next year will be P25 million. The analyst also estimates that the company’s free cash flow will increase at a constant rate of 7% a year and that the company’s WACC is 10%. ATR Kim Eng has P200 million of long-term debt and preferred stock and 30 million outstanding shares of common stock. In the Philippine stock exchange, ATR Kim Eng's common stock is traded at P30.00. What can be said of the stock price's condition? a. undervalued/underpriced b. overvalued/overpriced c. oversold d. in equillibriumarrow_forward
- An analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The analyst estimates that ATR Kim Eng's free cash flow during the next year will be P25 million. The analyst also estimates that the company's free cash flow will increase at a constant rate of 7% a year and that the company's WACC is 10%. ATR Kim Eng has P200 million of long- term debt and preferred stock and 30 million outstanding shares of common stock. What is the estimated per-share price of ATR Kim Eng's common stock? O P27.78 O P8.33 O P34.43 O P21.11arrow_forwardAn analyst is trying to estimate the intrinsic value of the stock of ATR Kim Eng. The analyst estimates that ATR Kim Eng’s free cash flow during the next year will be P25 million. The analyst also estimates that the company’s free cash flow will increase at a constant rate of 7% a year and that the company’s WACC is 10%. ATR Kim Eng has P200 million of long-term debt and preferred stock and 30 million outstanding shares of common stock. What is the estimated per-share price of ATR Kim Eng’s common stock? Group of answer choices P21.11 P27.78 P34.43 P8.33arrow_forwardXYZ has an expected Free Cash Flow of $109M next year and will remain the same in perpetuity. It has a WACC of 8%. The Company has Short term investment amounting to $104M. The Company has Preferred stock of $50M, Debt of $97M and 110M of common stock outstanding. What is the intrinsic value of its common stock?arrow_forward
- Suppose that Rose Industries is considering the acquisition of another firm in its industry for $137 million. The acquisition is expected to increase Rose's free cash flow by $5 million the first year, and this contribution is expected to grow at a rate of 4% every year thereafter. Rose currently maintains a debt to equity ratio of 1, its corporate tax rate is 21%, its cost of debt rD is 6%, and its cost of equity rE is 10%. Rose Industries will maintain a constant debt-equity ratio for the acquisition. The Free Cash Flow to Equity (FCFE) for the acquisition in year O is closest to ($ Million) (2 decimal places):arrow_forwardLALAMOVE Trucking Inc. is expected to generate EBIT of $5 million annually in perpetuity (starting in one year). LALAMOVE is all equity financed and shareholders require a return of 11%. The corporate tax rate is 35%. LALAMOVE is proposing to issue $5 million of perpetual bonds with an annual coupon of 6%. The company uses the $5M of debt to repurchase stock at $15.65 per share. Assume that, after borrowing the $5M, LALAMOVE never increases or decreases its debts. What is the share price after the new debt issue?arrow_forwardGRK Co. is currently an all-equity firm with an expected return of 10%. The expected EBIT is $ 50,000 forever. Assume that the firm distributes all the net income to the equity holders. The firm is considering a leveraged recapitalization in which it would borrow $ 250,000 and repurchase existing shares. The firm's tax rate is 40%. The cost of debt is 7%. 1/ Calculate the value of the firm with leverage. 2/ Calculate the expected return of equity after recapitalization. 3/ Calculate the cost of capital of the firm after recapitalization.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
EBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Discounted cash flow model; Author: Edspira;https://www.youtube.com/watch?v=7PpWneOBJls;License: Standard YouTube License, CC-BY