Hastings estimates that if it acquires Vandell, interest payments will be $1,500

Question

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 $1.472 million, after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. What is the unlevered value of Vandell, and what is the value of its tax shields? What is the per share value of Vandell to Hastings Corporation? Assume that Vandell now has $10.82 million in debt.

Explanation / Answer

Assume that Vandell now has $10.82M in debt. rSU = wdrd + wsrsL rSU =30%*8% + 70%*13.4% rSU = 11.78% Tax Shields 1-3 Tax Shields 1-3 Tax Shields 1-3 = Interest * Tax Rate = 1.5M * 40% = 600,000 Tax Shield 4 = $1,472,000 * 40% Tax Shield 4 = $588,800 Tax Shield Horizon Value Tax Shield Value rSU)^4 Tax Shield Value = (588,800*1.05)/(11.78%-5%) = $9.12M = 600K/(1+ rSU)+600K/(1+ rSU)^2+600K/(1+ rSU)^3+(588,800+9.12M)/(1+ = $7.67M Unlevered Vops = 2.5/(1+rSU) + 2.9/(1+rSU)^2 + 3.4/(1+rSU)^3 + (3.57 + 55.29)/(1+rSU)^4 Unlevered Vops = $44.69M Vops Vops Vops = Unlevered Vops + Value of Tax Shields = $44.69 + $7.67 = $52.36M Equity Value = (Vops Debt)/Number of Shares = ($52.36 10.82)/1M = $41.54M/1M P0 = $41.54/share

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