Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has 1 million shares outstanding and...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.60 (i.e., based on its target capital structure). Vandell's debt interest rate is 7.8%. Assume that the risk-free rate of interest is 3% and the market risk premium is 8%. Both Vandell and Hastings face a 35% tax rate. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.5 million, $3.0 million, $3.5 million, and $3.85 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 $10.31 million in debt (which has a 7.8% 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 $1.484 million, after which the interest and the tax shield will grow at 5%. a. What is Vandell's pre-acquisition levered cost of equity? What is its unlevered cost of equity? Do not round intermediate calculations. Round your answers to two decimal places. Pre-acquisition levered cost of equity: Unlevered cost of equity: 15.8 % % b. What is the intrinsic unlevered value of operations at t = 0 (assuming the synergies are realized)? Do not round intermediate calculations. Round your answer to the nearest cent. $ c. What is the value of the tax shields at t = 0? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. million d. What is the total intrinsic value of operations at t = 0? What is the intrinsic value of Vandell's equity to Hastings? What is Vandell's intrinsic stock price per share? Do not round intermediate calculations. Enter your answers for the value of operations and the equity value to acquirer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answers to two decimal places. Value of operations: $ Equity value to acquirer: $ Intrinsic stock price per share: $ million million Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.60 (i.e., based on its target capital structure). Vandell's debt interest rate is 7.8%. Assume that the risk-free rate of interest is 3% and the market risk premium is 8%. Both Vandell and Hastings face a 35% tax rate. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.5 million, $3.0 million, $3.5 million, and $3.85 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 $10.31 million in debt (which has a 7.8% 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 $1.484 million, after which the interest and the tax shield will grow at 5%. a. What is Vandell's pre-acquisition levered cost of equity? What is its unlevered cost of equity? Do not round intermediate calculations. Round your answers to two decimal places. Pre-acquisition levered cost of equity: Unlevered cost of equity: 15.8 % % b. What is the intrinsic unlevered value of operations at t = 0 (assuming the synergies are realized)? Do not round intermediate calculations. Round your answer to the nearest cent. $ c. What is the value of the tax shields at t = 0? Do not round intermediate calculations. Enter your answer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answer to two decimal places. million d. What is the total intrinsic value of operations at t = 0? What is the intrinsic value of Vandell's equity to Hastings? What is Vandell's intrinsic stock price per share? Do not round intermediate calculations. Enter your answers for the value of operations and the equity value to acquirer in millions. For example, an answer of $1.23 million should be entered as 1.23, not 1,230,000. Round your answers to two decimal places. Value of operations: $ Equity value to acquirer: $ Intrinsic stock price per share: $ million million
Expert Answer:
Posted Date:
Students also viewed these finance questions
-
Benny sells an apartment building. His adjusted basis for regular income tax purposes is $450,000, and it is $475,000 for AMT purposes. He receives $700,000 from the sale. a. Calculate Bennys gain...
-
Give two examples of a value-added cost and two examples of a non-value-added cost.
-
What are the building blocks of corporate reputation? What might be the building blocks of the BBC?
-
Find missing values on income statement (Learning Objective 4) A skeleton of Heirloom Mills income statement appears as follows (amounts in thousands): Use the following ratio data to complete...
-
New tire retreading equipment, acquired at a cost of $110,000 at the beginning of a fiscal year, has an estimated useful life of four years and an estimated residual value of $7,500. The manager...
-
Using the fact that the centroid of a triangle lies at the intersection of the triangle's medians, which is the point that lies one-third of the way from each side toward the opposite vertex, find...
-
Compare and contrast the Principles and the Rules.
-
How do hormones like insulin and glucagon interact to maintain glucose homeostasis, and what are the pathophysiological consequences when this balance is disturbed in conditions like diabetes...
-
Marta, an attorney for the family of a man killed in an auto accident, visit a bar and runs into a juror. Nicholas, a criminal defense attorney, puts his client on the stand to testify to her...
-
French Corporation has 500,000 shares of common stock that sells for $25 per share and has a beta of 1.5. Treasury Bills are yielding 4% and the market return is expected to be 12%. The company has...
-
Solomon Sooners is a 40 year old man and unmarried. He is a sole supporter of his parents. The parents have no income. His father is 67 of age and in good health; his mother is 64 years old and...
-
A particular heat engine has a mechanical power output of5.20kW and an efficiency of24.0%. The engine expels9.5010 3 J of exhaust energy in each cycle. (a) Find the energy taken in during each cycle....
-
x i Frequency Relative Frequency (Probability) x i * P(x i ) x i - E(x) (x i - E(x))^2 (x i - E(x))^2* P(x) 1 13 0.0619 2 12 0.0571 3 9 0.0429 4 15 0.0714 5 32 0.1524 6 24 0.1143 7 21 0.1000 8 5...
-
The rate at which the temperature of an object changes is proportional to the difference between its own temperature and the temperature of the surrounding medium. Express this rate as a function of...
-
Explain what is meant by feedforward control and distinguish it from feedback control. R-1
-
Computing Ending Balance of Retained Earnings LO1-1 Sultan Inc. was organized on January 1, 2020. It reported the following for its first two years of operations: Required: Compute the ending balance...
-
What is meant by a variance? What is the point in analysing variances? R-2
Study smarter with the SolutionInn App