What is vandell pre-acquisition levered cost of equity

Reference no: EM132206300

Question - Merger Valuation with the CAPV Model

Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 through 4 respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell's $10.82 million in debt (which has an 8% interest rate and raise additional debt financing at the time of the acquistion Hastings estimates that interest payments will be $1.5 million each year for Years 1, 2, and 3, After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.472 million, after which the interest and the tax shield will grow at 5%.

Vandell currently has 1 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.4 (i.e. based on its target capital structure).

a. What is Vandell's pre-acquisition levered cost of equity? What is its unlevered cost of equity?

b. What is the intrinsic unlevered value of operations at t = 0 (assuming the synergies are realized)?

c. What is the value of the tax shields at t = 0?

d. What is the total intrinsic value of operations at t = 0? What is the intrinsic value of Vandell's equity to Hastings? What is Vandell's intrinsic stock price per share?

Reference no: EM132206300

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