Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has

Question

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 7.3%. Assume that the risk-free rate of interest is 5% and the market risk premium is 5%. Both Vandell and Hastings face a 35% tax rate.

Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.445 million after which interest and the tax shield will grow at 4%. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and then $3.72 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 4% rate.

What is the unlevered value of Vandell? Vandell's beta is 1.10. Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate calculations.
$   million

What is the value of its tax shields? Enter your answer in millions. For example, an answer of $1.2 million should be entered as 1.2, not 1,200,000. Round your answer to two decimal places. Do not round intermediate calculations.
$   million

What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $11.88 million in debt. Round your answer to the nearest cent. Do not round intermediate calculations.
$   per share

Explanation / Answer

FCF1 = $2.5 million, FCF2 = $2.9 million and FCF3 = $3.4 million; g = 4%; b = 1.4; rRF = 5%; RPM = 5%; wd = 30%; T = 35%; rd = 7.3% Vops = ? P0 = ? Horizon Value3 = FCF3(1+g)/(WACC

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