Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandells free cash flows to
Question:
Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 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 $10.82 million in debt (which has an 8% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.5 million each year for Years 1, 2, and 3. After year 3, a target capital structure of 30% debt will be maintained. Interest at year 4 will be $1.472 million after which the interest and tax shield will grow at 5%. As described in problem 22-1, Vendell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.4 (i.e., based on its target capital structure).
a What is Vandell's pre-acquisition levered cost of equity? What is its unlevered cost of equity? (Hint: You can use the pre-acquisition levered cost of equity you determined previously if you worked Problem 22-1.)
b. What is the intrinsic unlevered value of operations at t 0 (assuming the synergies are realized)?
C. What is the value of the tax shields at t 0? d what is the total intrinsic value of operations at t = 0?
d. What is the intrinsic value of Vandell's equity to Hastings? What is Vandell's intrinsic stock price per share?
Financial management theory and practice
ISBN: 978-0324422696
12th Edition
Authors: Eugene F. Brigham and Michael C. Ehrhardt