What is the unlevered value of operations

Assignment Help Finance Basics

Reference no: EM132000303

Question: Merger Valuation with Change in Capital Structure Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.20 (given its target capital structure). Vandell's debt interest rate is 7.1%. Assume that the risk-free rate of interest is 3% and the market risk premium is 7%. Both Vandell and Hastings face a 35% tax rate. Hastings Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's free cash flows to be $2.3 million, $3.2 million, $3.3 million, and $3.95 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hastings plans to assume Vandell's $10.46 million in debt and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.6 million each year for Years 1, 2, and 3. Suppose Hastings will increase Vandell's level of debt at Year 3 to $29.2 million so that the target capital structure becomes 45% debt. Assume that with this higher level of debt, the interest rate would be 8.5%, and assume that interest payments in Year 4 are based on the new debt level at Year 3 and the 8.5% interest rate. The Year-4 interest expense is expected to grow at 5% after Year 4.

What is the Year-4 interest expense? What is the Year-4 tax shield? Round your answer to two decimal places. Do not round intermediate calculations.

Year-4 interest expense: $ million

Year-4 tax shield: $ million

What is the unlevered value of operations? What is the value of the tax shield? Round your answer to two decimal places. Do not round intermediate calculations. Unlevered value of operations: $ million

Value of tax shield: $ million

What is the maximum price per share that Hastings would bid for Vandell? Round your answer to the nearest cent. Do not round intermediate calculations. Maximum price per share that Hastings would bid for Vandell: $ /share

Reference no: EM132000303

Questions Cloud

What is the current stock price : If next year's dividend is $10 and the market capitalization rate is 14%, what is the current stock price? (Round your answer to 2 decimal places

Why is the way expenditure is accounted for important : Is the accounting treatment of the new engine a "judgment call" that could go either way? What do you believe to be the correct accounting for this item?

What is total aftertax cash flow to shareholders : What is the total aftertax cash flow to shareholders if the shareholder invests in preferred stock?

Part in the management of a company : Shareholder value and ethical problems play a part in the management of a company. Explain how.

What is the unlevered value of operations : What is the unlevered value of operations? What is the value of the tax shield? Round your answer to two decimal places. Do not round intermediate calculations.

Research articles on bullying cases that occur today : Recent history illustrates that bullying is a growing problem among today's youth in the United States.

Calculate preliminary materiality : Following are extracts from annual financial statement. Calculate preliminary materiality. Justify your decision of materiality base and choice of materiality

Annual discrete compounding risk-free rate : If the annual discrete compounding risk-free rate is 10%, and the cost of carry offsets the convenience yield exactly, then what is your hedging strategy?

Indicate the range of possible prices for each share : Indicate the range of possible prices that Hastings could bid for each share of Vandell common stock in an acquisition. Round your answers to the nearest cent.

User Account

All Pages