Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a...

  
 

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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 7.5%. Assume that the risk-free rate of interest is 3% and the market risk premium is 6%. Both Vandell and Hastings face a 35% tax rate. Vandell's beta is 1.25. 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 $2.4 million, $3.1 million, $3.3 million, and then $3.98 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.5 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.0 %, 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. X Open spreadsheet 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. $ !!! 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. A $ What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has $9.28 million in debt. Enter your answer in dollars. Fort 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. DZO 1 2 3 Current target capital structure: 4 Debt Equity Number of common shares outstanding Current debt amount 5 6 7 A Merger Valuation with Change in Capital Structure 8 9 10 Risk-free rate 11 Market risk premium 12 Tax rate Beta 13 14 15 Debt interest rate Interest payments, Years 1-3 Growth rate 16 Free cash flow, Year 1 17 Free cash flow, Year 2 18 Free cash flow, Year 3 19 Free cash flow, Year 4 20 21 Level of debt, Year 3 22 New interest rate at higher debt level 23 New target capital structure: 24 Debt 25 Equity 26 B 30.00% 70.00% 1,000,000 $9,280,000 7.50% 3.00% 6.00% 35.00% 1.25 $1,600,000 6.00% $2,400,000 $3,100,000 $3,300,000 $3,980,000 $34,500,000 8.00% 45.00% 55.00% 27 Calculate target firm's levered cost of equity 28 st. 29 30 Calculate target firm's unlevered cost of equity 31 U 32 33 Calculate target firm's unlevered value: 34 Unlevered horizon value of FCF 35 Unlevered value of operations 36 37 Calculate value of interest tax shields: 38 Tax shield, Year 1 39 Tax shield, Year 2 40 Tax shield, Year 3. 41 Tax shield, Year 4 42 Tax shield, Horizon value 43 44 Value of tax shields 45 46 Calculate target firm's per share value to acquiring firm: 47 Value of operations 48 Target firm's equity value to acquiring firm 49 Per share value to acquiring firm 50 Formulas #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A 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 7.5%. Assume that the risk-free rate of interest is 3% and the market risk premium is 6%. Both Vandell and Hastings face a 35% tax rate. Vandell's beta is 1.25. 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 $2.4 million, $3.1 million, $3.3 million, and then $3.98 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.5 million so that the target capital structure will be 45% debt. Assume that with this higher level of debt the interest rate would be 8.0 %, 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. X Open spreadsheet 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. $ !!! 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. A $ What is the maximum total price that Hastings would bid for Vandell now? Assume Vandell now has $9.28 million in debt. Enter your answer in dollars. Fort 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. DZO 1 2 3 Current target capital structure: 4 Debt Equity Number of common shares outstanding Current debt amount 5 6 7 A Merger Valuation with Change in Capital Structure 8 9 10 Risk-free rate 11 Market risk premium 12 Tax rate Beta 13 14 15 Debt interest rate Interest payments, Years 1-3 Growth rate 16 Free cash flow, Year 1 17 Free cash flow, Year 2 18 Free cash flow, Year 3 19 Free cash flow, Year 4 20 21 Level of debt, Year 3 22 New interest rate at higher debt level 23 New target capital structure: 24 Debt 25 Equity 26 B 30.00% 70.00% 1,000,000 $9,280,000 7.50% 3.00% 6.00% 35.00% 1.25 $1,600,000 6.00% $2,400,000 $3,100,000 $3,300,000 $3,980,000 $34,500,000 8.00% 45.00% 55.00% 27 Calculate target firm's levered cost of equity 28 st. 29 30 Calculate target firm's unlevered cost of equity 31 U 32 33 Calculate target firm's unlevered value: 34 Unlevered horizon value of FCF 35 Unlevered value of operations 36 37 Calculate value of interest tax shields: 38 Tax shield, Year 1 39 Tax shield, Year 2 40 Tax shield, Year 3. 41 Tax shield, Year 4 42 Tax shield, Horizon value 43 44 Value of tax shields 45 46 Calculate target firm's per share value to acquiring firm: 47 Value of operations 48 Target firm's equity value to acquiring firm 49 Per share value to acquiring firm 50 Formulas #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A

Answer rating: 100% (QA)

Unlevered Firm Value Calculation Forecasted Unlevered Free Cash Flows Year 1 2400000 Year 2 3100000 ... View the full answer