Hastings estimate that if it acquires Vandell, interest payments will be $1,500,

Question

Hastings estimate that if it acquires Vandell, interest payments will be $1,500,000 per year 3 years, after which the current target capital structure of 30% debt will be maintained. Interest in the fourth yeatr will b $1.472 million, after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million in years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. What is the per share value of Vandell to Hastings Corporation? Assume that Vandell now has $10.82 million in debt. ** Please show me how to get the answer, thank you. **

Explanation / Answer

Assume that Vandell now has $10.82M in debt. rSU = wdrd + wsrsL rSU =30%*8% + 70%*13.4% rSU = 11.78% Tax Shields 1-3 Tax Shields 1-3 Tax Shields 1-3 = Interest * Tax Rate = 1.5M * 40% = 600,000 Tax Shield 4 = $1,472,000 * 40% Tax Shield 4 = $588,800 Tax Shield Horizon Value Tax Shield Value rSU)^4 Tax Shield Value = (588,800*1.05)/(11.78%-5%) = $9.12M = 600K/(1+ rSU)+600K/(1+ rSU)^2+600K/(1+ rSU)^3+(588,800+9.12M)/(1+ = $7.67M Unlevered Vops = 2.5/(1+rSU) + 2.9/(1+rSU)^2 + 3.4/(1+rSU)^3 + (3.57 + 55.29)/(1+rSU)^4 Unlevered Vops = $44.69M Vops Vops Vops = Unlevered Vops + Value of Tax Shields = $44.69 + $7.67 = $52.36M Equity Value = (Vops Debt)/Number of Shares = ($52.36 10.82)/1M = $41.54M/1M P0 = $41.54/share

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