Hastings Corporation is interested in acquiring Vandell Corporation. Vandell cur

Question

Hastings Corporation is interested in acquiring Vandell Corporation. Vandell currently has a cost of equity of 10%; 25% of its financing is in the form of 6% debt, and the rest is in common equity. Its federal-plus-state tax rate is 34%. After the acquisition, Hastings expects Vandell to have the following FCFs and interest payments for the next three years (in millions). After this, the free cash flows are expected to grow at a constant rate of 5.3%, and the capital structure will stabilize at 35% debt with an interest rate of 7%. What is the present value, in millions, of tax shield?

23.36

23.36

Explanation / Answer

Discount rate=6%

PV of tax shield for 3 years

=(28*.35)/(1+6%)+ (24*0.35)/(1+6%)^2+ (23.36*0.35)/(1+6%)^3

=$23.585

Terminal value of tax sheild=t × DebtN × Re × (1 + g) / (Re g)2

Information is missing for caluclating this

=0.35*

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