Hasting corporation is interested in acquiring Vandell Corporation. Vandell has

Question

Hasting corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Van dells debt interest rate is 8%. Assume that the risk-free rate of interest is 4% and the market risk premium is 5%. Both Vandell and Hasting face 35% tax rate. Van dells free cash flow (FCFo) is )2million per year and is expected to grow at a constant rate of 4% a year; it's beta is 1.60. What is the value of Vandells operations? If Vandell has $10.80 million in debt, what is the current value of Vandells stock? Round answer to nearest cent. Hasting corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt. Van dells debt interest rate is 8%. Assume that the risk-free rate of interest is 4% and the market risk premium is 5%. Both Vandell and Hasting face 35% tax rate. Van dells free cash flow (FCFo) is )2million per year and is expected to grow at a constant rate of 4% a year; it's beta is 1.60. What is the value of Vandells operations? If Vandell has $10.80 million in debt, what is the current value of Vandells stock? Round answer to nearest cent. Van dells free cash flow (FCFo) is )2million per year and is expected to grow at a constant rate of 4% a year; it's beta is 1.60. What is the value of Vandells operations? If Vandell has $10.80 million in debt, what is the current value of Vandells stock? Round answer to nearest cent.

Explanation / Answer

COST OF CAPITAL (Ke)

= Rf + BETA * MARKET RISK PREMIUM

= 4% + 1.6 * 5%

= 4% + 8%

= 12%

VALUE OF VANDELLS OPERATIONS

= CASH FLOW OF NEXT YEAR / (Ke - GROWTH)

= ($2 MILLION * 104%) / (12% - 4%)

= $2.08 MILLION / 8%

= $26 MILLIONS

CURRENT VALUE OF VANDELLS STOCKS

= TOTAL VALUE - VALUE OF DEBT

= $26 MILLIONS - $10.80 MILLIONS

= $15.20 MILLIONS

PRICE OF A STOCK

= $15.20 MILLIONS / 1 MILLIONS

= $15.20

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