a)
To determine: The company V’s pre-acquisition levered
a)
Explanation of Solution
The computation of company V’s pre-acquisition levered cost of equity and unlevered cost of equity is as follows:
Current b = 1.4; rRF = 5%; RPM = 6%; current wd = 30%; T = 40%; rd = 8%,
Hence, the levered cost of equity and unlevered cost of equity is 13.4% and 11.78% respectively.
b)
To determine: The unlevered value of operations.
b)
Explanation of Solution
The computation of unlevered value of operation is as follows:
Hence, the unlevered value of operation is $44.69.
c)
To determine: The value of tax shield.
c)
Explanation of Solution
The computation of value of tax shield is as follows:
Hence the value of tax shield is $7.67million.
d)
To determine: The total intrinsic value of operations, intrinsic value of company V’s equity to company H and company V’s intrinsic stock price per share.
d)
Explanation of Solution
The computation of total value of operation is as follows:
Hence the total value of operation is $52.36 million.
The computation of equity value to acquirer is as follows:
Hence, the equity value of company V to company H is $41.54million.
The computation of intrinsic stock price per share is as follows:
Hence, the intrinsic stock price per share is $41.54per share.
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Chapter 26 Solutions
INTERMEDIATE FINAN.MGMT.(LL)-W/MINDTAP
- 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 5% and the market risk premium is 7%. Both Vandell and Hastings face a 30% tax rate. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.456 million after which interest and the tax shield will grow at 6%. Synergies will cause the free cash flows to be $2.5 million, $2.8 million, $3.3 million, and then $3.98 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 6% rate. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open…arrow_forwardHastings 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 7.3%. Assume that the risk-free rate of interest is 4% and the market risk premium is 6%. Both Vandell and Hastings face a 30% tax rate. Hastings estimates that if it acquires Vandell, interest payments will be $1,500,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.459 million after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be $2.4 million, $3.0 million, $3.3 million, and then $3.72 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. What is…arrow_forwardHastings 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 7% and the market risk premium is 7%. Both Vandell and Hastings face a 30% tax rate. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years after which the current target capital structure of 30% debt will be maintained. Interest in the fourth year will be $1.443 million after which interest and the tax shield will grow at 4%. Synergies will cause the free cash flows to be $2.5 million, $2.8 million, $3.4 million, and then $3.98 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 4% rate. The data has been collected in the Microsoft Excel Online file below. Open the spreadsheet and perform the required analysis to answer the questions below. Open…arrow_forward
- XYZ Corporation arranged a repurchase agreement in which it purchasedsecurities for $4.9 million and will sell the securities back for $5.5 million in 40 days.What is the yield to XYZ Corporation?arrow_forwardAn acquiring firm is analyzing the possible acquisition of a target firm. Both firms have no debt. The acquiring firm believes the acquisition of the target firm will increase its total after-tax annual cash flow by $3.4 million per year forever. The appropriate discount rate for the incremental cash flows is 11 percent. The current market value of the target firm is $95 million, and the current market value of the acquiring firm is $160 million. if the acquiring firm pays $110 million in cash to the target firms shareholders. What is the net present value of the acquisition?arrow_forwardPenn Corporation is analyzing the possible acquisition of Teller Company. Both firms have no debt. Penn believes the acquisition will increase its total aftertax annual cash flows by $1.45 million indefinitely. The current market value of Teller is $31.5 million, and that of Penn is $53 million. The appropriate discount rate for the incremental cash flows is 10 percent. Penn is trying to decide whether it should offer 40 percent of its stock or $44.5 million in cash to Teller’s shareholders. a. What is the cost of each alternative? (Enter your answers in dollars, not millions of dollars, e.g, 1,234,567.) b. What is the NPV of each alternative? (Enter your answers in dollars, not millions of dollars, e.g, 1,234,567.)arrow_forward
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- J & J Enterprises is considering a cash acquisition of Patterson Steel Company for $5,800,000. Patterson will provide the following pattern of cash inflows and synergistic benefits for the next 20 years. There is no tax loss carryforward. Use Appendix D as an approximate answer, but calculate your final answer using the formula and financial calculator methods. Cash inflow (aftertax) Synergistic benefits (aftertax) Net present value b. Should the merger be undertaken? The cost of capital for the acquiring firm is 11 percent. a. Compute the net present value. (Negative amount should be indicated by a minus sign. Do not round intermediate calculations. Round your answer to 2 decimal places.) Yes 1-5 $620,000 58,000 O No Years 6-15 $780,000 78,000 16-20 $980,000 88,000arrow_forwardHastings 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 7.6%. Assume that the risk-free rate of interest is 6% and the market risk premium is 4%. Both Vandell and Hastings face a 30% tax rate. Vandell's beta is 1.35. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. The free cash flows are supposed to be $2.3 million, $2.8 million, $3.3 million, and then $3.70 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.2 million so that the target capital structure will be 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 from the end of Year 3 and new interest rate. Free cash flows and tax shields are projected…arrow_forwardHastings 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 7.6%. Assume that the risk-free rate of interest is 6% and the market risk premium is 4%. Both Vandell and Hastings face a 30% tax rate. Vandell's beta is 1.35. Hastings estimates that if it acquires Vandell, interest payments will be $1,600,000 per year for 3 years. The free cash flows are supposed to be $2.3 million, $2.8 million, $3.3 million, and then $3.70 million in Years 1 through 4, respectively. Suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $34.2 million so that the target capital structure will be 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 from the end of Year 3 and new interest rate. Free cash flows and tax shields are projected to…arrow_forward
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage Learning