Reference no: EM132928182

Hastings Corporation is interested in acquiring Vandell Corporation. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.5 million, $3.2 million, $3.4 million, and $3.91 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 4% rate. Hastings plans to assume Vandell's $9.04 million in debt (which has a 7.9% interest rate) and raise additional debt financing at the time of the acquisition. 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 $1.454 million, after which the interest and the tax shield will grow at 4%. Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.60 (i.e., based on its target capital structure). Vandell and Hastings each have a 30% combined federal-plus-state tax rate. The risk-free rate is 3% and the market risk premium is 8%.

Question 1: What is Vandell's pre-acquisition levered cost of equity? What is its unlevered cost of equity?

Question 2: What is the intrinsic unlevered value of operations at t = 0 (assuming the synergies are realized)?

Question 3: What is the value of the tax shields at t = 0?

Question 4: What is the total intrinsic value of operations at t = 0? What is the intrinsic value of Vandell's equity to Hastings? What is the maximum price per share that Hasting's should offer Vandell's shareholders?