Merger Valuation Hastings Corporation is interested in acquiring Vandell Corpora
ID: 2761327 • Letter: M
Question
Merger Valuation
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 7.5%. Assume that the risk-free rate of interest is 6% and the market risk premium is 4%. Both Vandell and Hastings face a 30% tax rate.
1. Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 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 $1.442 million after which interest and the tax shield will grow at 6%. Synergies will cause the free cash flows to be $2.6 million, $2.8 million, $3.4 million, and then $3.56 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 6% rate. What is the unlevered value of Vandell? Vandell's beta is 1.60. 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.
ANSWER: $ __ million
2. 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.
ANSWER: $ __ million
3. What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $11.33 million in debt. Round your answer to the nearest cent. Do not round intermediate calculations.
ANSWER: $ __ per share
Explanation / Answer
1)We first need to find WACC WACC=[MV(Debt)/MV (Equity)+MV(Debt)*Rd*(1-t)]+[MV(Equity)/MV(Equity)+MV(Debt)*Re] MV(Debt)/MV(Equity)+MV(Debt)=30% MV(Equity)/MV (Equity)+MV(Debt)=70% Rd=8% Re=Risk Free Rate+Beta(Market Premium) =5%+1.4(6%) 13.40% Tax Tare=40% WACC=0.3*.08*(1-.4)+0.7*.134 0.1082 ie 10.82% 2)Find Firm Value Firm Value=FCF(1+g)/WACC-g Where, g(Growth)=5% FCF=2000000(Given) Firm Value=2000000(1+.05)/0.1082-.05 36082474 ie 36.08 Millions Equity Value=Firm Value-Debt Value 36082474-10820000 25262474 ie 25.26 million Equity Value per share=25262474/1000000 25.26247