Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell’s free cash flows to be $2.5 million, $2.9 million, $3.4 million, and $3.57 million at Years 1 through 4, respectively, after which the free cash flows will grow at a constant 5% rate. Hasting plans to assume Vandell’s $10.19 million in debt (which has an 8% interest rate) and raise additional debt financing at the time of the acquisition. Hastings estimates that interest payments will be $1.5 million each year for Years 1, 2, and 3. After Year 3, a target capital structure of 30% debt will be maintained. Interest at Year 4 will be $1.472 million, after which the interest and the tax shield will grow at 5%. Vandell currently has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its current beta is 1.4 (i.e., based on its target capital structure). Vandell and Hastings each have a 25% combined federal-plus-state tax rate. The risk-free rate is 5% and the market risk premium is 6%.
What is Vandell’s pre-acquisition levered cost of equity? What is its unlevered cost of equity?
What is the intrinsic unlevered value of operations at t = 0 (assuming the synergies are realized)?
What is the value of the tax shields at t = 0?
What is the total intrinsic value at t = 0? What is the intrinsic value of Vandell’s equity to Hasting? What is the maximum price per share that Hasting’s should offer Vandell’s shareholders?