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 4% and the market risk premium is 5%. Both Vandell and Hastings face a 35% tax rate. Vandell's free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year; its beta is 1.45. 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 $1.415 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.3 million, $2.7 million, $3.3 million, and then $3.60 million, after which the free cash flows will grow at a 5% rate. Assume Vandell now has $11.27 million in debt. Indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Round your answers to the nearest cent. Do not round intermediate calculations. The bid for each share should range between $____ per share and $______ per share.

Explanation / Answer

Vendal's Expected Rate of return = 4% + 1.45 x 5% = 11.25% Vendal's Free Cash flow $       2,000,000.00 Current Market Value of Vendal Corporation $    32,000,000.00 =2000000/(11.25%-5%) pv factor Present Year Free cashflows at 11.25% Balue 1 2000000 0.8988764 1797752.809 2 2000000 0.8988764 1797752.809 3 2000000 0.8988764 1797752.809 4 2300000 0.8988764 2067415.73 5 2700000 0.8988764 2426966.292 6 3300000 0.8988764 2966292.135 7 3600000 0.8988764 3235955.056 8 60480000 0.8988764 54364044.94 Total 70453932.58 Income in 8th year will be 360000 x 1.05 = 3780,000 Value of Shares = 3780000/(11.25%-5%) = 60,480,000 Answer: $32,000,000 and $60,480,000

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