Valuation Hastings Corporation is interested in acquiring Vandell Corporation. V
ID: 2760986 • 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 7.2%. Assume that the risk-free rate of interest is 4% and the market risk premium is 5%. Both Vandell and Hastings face a 35% tax rate.
1) 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 1.35. 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
2) If Vandell has $10.43 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
Vandel 's Debt is 30% So Equity =70% Cost of Debt =7.2% Tax Rate =35% Post Tax cost of Debt =7.2%*0.65= 4.68% Risk Free rate Rf=4% Marker Risk Premium=Rpm=5% Beta=1.35 Required Return of Stock = Rf+beta*Rpm =4% +1.35*5%= 10.75% So required Return of Stock is 10.75% WACC of Vandell =E/(D+E)*Cost of Equity +D/(D+E)*post tax cost of debt =0.70*10.75% +0.30*4.68% = 8.93% WACC of Vandell =8.93% Vandell's free cash flow per year = 2.00 million Expected growth rate of free cash flow per year= 4% So Value of Vandell= 2*1.04/(0.1075-0.04)= 30.8 Million 1.0 Value of Vandell's Operation =30.80 million 2.0 Vandell's Debt value 10.43 million Value of Vandell's total stock=30.8-10.43= $ 20.38 million Outstanding common stock of Vandell= 1.0 million Share Price of Vandell = $ 20.38 per share
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