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Chapter 22 Problem #1

- Vandell has $2 million in annual free cash flow that grows at 5% annually and a beta of 1.4. Its cost of equity is calculated to be 13.4% - Using the WACC and perpetual growth methods, the unlevered value of Vandell is calculated to be between $29.49 million and $44.72 million - Given Vandell has 1 million shares outstanding, the value per share is between $29.49 and $44.72. Therefore, the range of possible prices Hastings could bid per share of Vandell stock is $29.49 to $44.72.

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Lê Đặng Minh Thảo
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1K views

Chapter 22 Problem #1

- Vandell has $2 million in annual free cash flow that grows at 5% annually and a beta of 1.4. Its cost of equity is calculated to be 13.4% - Using the WACC and perpetual growth methods, the unlevered value of Vandell is calculated to be between $29.49 million and $44.72 million - Given Vandell has 1 million shares outstanding, the value per share is between $29.49 and $44.72. Therefore, the range of possible prices Hastings could bid per share of Vandell stock is $29.49 to $44.72.

Uploaded by

Lê Đặng Minh Thảo
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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Chapter 22 Problem #1

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 8%.
Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Vandell and
Hastings face a 40% tax rate.

Vandell's free cash flow (FCF) is $2 million per year and is expected to grow at a constant rate of 5% a
year; its beta is 1.4. what is the value of Vandell's operations? If Vandell has $10.82 million in debt,
what is the current value of Vandell's stock? (Hint: Use the corporate valuation model from Chapter 7.)

What I know:
FCF Vandell's $2 million
Growth rate of FCF 5%
Beta of Vandell's 1.4
Risk free rate 5%
Market risk premium 6%

Corporate valuation model


Cost of Equity = Risk free rate + Risk Premium X Beta

Cost of Equity = 13.400%

WACC = Percentage of financing that is equity X Cost of Equity + Percentage of financing that is debt X cost of deb
WACC = 11.78%

Value of Vandell's
FCF Method = FCF divided by (WACC - Growth rate of FCF)
Value of Vandell's = 29.49852507 Million

Value of Capital = debt divided by % of debt


Vandell's debt = 10.82 million
Vandell's total capital = 30%
Value of Vandell's = 36.06666667 million

Value of Vandell's Stock = 25.24666667

Based on my calculations using the capital structure value of the firm is $25.25 million.
1 million shares
interest rate is 8%.
%. Both Vandell and

a constant rate of 5% a
0.82 million in debt,
model from Chapter 7.)

f financing that is debt X cost of debt X (1 - Corporate tax rate)


Chapter 22 Problem #2

Hastings estimates that if it acquires Vandell, interest payments will be $1.5 million per year for 3 years, after which
current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.472 million, afte
which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.5 million, $2.9 m
$3.4 million, and $3.57 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5%
What is the unlevered value of Vandell, and what is the value of its tax shields? What is the per share value of Vande
Hastings Corporation? Assume that Vandell now has $10.82 million in debt.

What I know:
Growth rate 5%
Beta 1.4
risk free rate 5%
market risk premium 6%

Cost of equity = risk free rate + Risk Premium X Beta


Cost of equity = 13.400%

WACC = Percentage of financing that is equity X Cost of Equity + Percentage of financing that is debt X cost of deb
WACC = 11.78%

Cash Flow Year1 Year 2 Year 3 Year 4


2.5 2.9 3.4 3.57
Cash flows will grow 5%

Terminal Value = fourth year CF X ( 1 + CF growth rate) divided by WACC - CF growth rate
Terminal Value for Vandell= $55.29 million
Present Value for Vandell = CF year 1/(1+WACC) + CF year 2/(1+WACC)^2 = CF year 3/(1+WACC)^3 + CF year
Present Value for Vandell = 2.24 + 2.32 +2.43 + 37.73
Present Value for Vandell = $44.72 million

unlevered value of Vandell = PV - debt


unlevered value of Vandell = $33.90 million

Interest per year for year 1-3 1.5 million


Interest for year 4 1.472 million
Tax shield for Vandell = interest year 4 ivided by (WACC - CF growth rate)
Tax shield for Vandell = 21.71
Present Value for Vandell = Interest year 1/(1+WACC) + Interest year 2/(1+WACC)^2 = Interest year 3/(1+WACC)
Present Value for Vandell = 1.34 + 1.2 + 1.07+ 14.86
Present Value for Vandell = $18.46 million

Total number of shares


outstanding = 1 million
Value of Vandells = 44.72

Value per share = $44.72


per year for 3 years, after which the
year will be $1.472 million, after
flows to be $2.5 million, $2.9 million,
ee cash flows will grow at a 5% rate.
t is the per share value of Vandell to

ancing that is debt X cost of debt X (1 - Corporate tax rate)

year 3/(1+WACC)^3 + CF year 4 + 55.29/(1+WACC)^4

)^2 = Interest year 3/(1+WACC)^3 + interest year 4 + 21.71/(1+WACC)^4


Chapter 22 Problem #3

On the basis of your answers to Problems 22-1 and 22-2, indicate the range of possible prices
that Hastings could bid for each share of Vandell common stock in an acquisition.

Looking at my answers for 22-1 and 22-2 I found that the value of Vandells is between $29.49
million to $44.72 million.

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