Valuation Hastings Corporation is interested in acquiring Vandell Corporation. V
ID: 2750402 • Letter: 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 7.4%. Assume that the risk-free rate of interest is 4% and the market risk premium is 4%. Both Vandell and Hastings face a 30% tax rate.
Vandell's free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 4% a year; its beta is 1.45. 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 $10.37 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:
Cost of equity = Risk free rate + Beta * Market risk premium = 4% +1.45*4% = 9.8%
Post tax Cost of debt = Interest rate (1-tax rate) = 7.4% (1-0.3) = 5.18%
WACC = Weight of equity * Cost of equity + Weight of debt * Weight of debt
= 0.7*9.8% + 0.3* 5.18% = 8.414%
a) Value of the firm = FCFE 1 /(WACC - growth rate) = {$2 million(1+0.04)} /(0.08414 - 0.04)
= $2.08 million /0.04414 = $47.12 million (ans)
b)Value of equity = Value of the firm - Value of debt = $47.12 million - $10.37 million = $36.75 million
Value per share = Value of equity/No. of equity share outstanding = $36.75 million/1 million = $36.75 per share (ans)
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