Valuation Hastings Corporation is interested in acquiring Vandell Corporation. V

Question

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 7.3%. Assume that the risk-free rate of interest is 4% and the market risk premium is 5%. Both Vandell and Hastings face a 40% tax rate.

Vandell's free cash flow (FCF0) is $1 million per year and is expected to grow at a constant rate of 6% a year; its beta is 1.60. What is the value of Vandell's operations? (Hint: Use the corporate valuation model.) Round your answer to two decimal places. Do not round intermediate calculations.

$ ___million

If Vandell has $8.54 million in debt, what is the current value of Vandell's stock? (Hint: Use the corporate valuation model.) Round your answer to the nearest cent. Do not round intermediate calculations.

$ ___/share

Explanation / Answer

Answer: rs= rRF+ RPM(b)

Where:

rs=Cost of equity

rRF=Risk free assets

b=Beta

RPM=Market risk premium

= 4% + 5% (1.6)= 12%

WACC= wd * rd (1-T) + ws* rs

Where:

Wd=Weight of Debt

We=Weight of equity

rd=Cost of debt

rs=Cost of equity

= 30%(7.3%)(1-40%) + 70%(12%)

= 9.714%

Vop= FCF0(1+g)/WACC-g

Vop= $1/(9.314%-6%)

Vop= $30175015.08

VS= Vop – Debt

VS= 30175015.08– 8540000= 21635015.08

P0= 21635015.08/1000000 shares

P0= $21.64 per share

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