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 (FCF0) 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 operation? If Vandell has $10.82 million in debt, what is the current value of Vandell’s stock?
Hint: The following formulas can be used to help you with your calculations:
(1) WACC = wdrd(1-T) + wsrs
(2) rs = rRF + RPM(ß)
(3) Vops = [FCF0 x (1+g)]/(WACC - g)
(4) Vstock = Vops – debt
