On the basis of your answers to Problems 1 and 2, if Hastings were to acquire Vandell, what would be the range of possible prices that it could bid for each share of Vandell common stock?
Problem 1:
Vandell's free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5 percent 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 of Chapter 11.)
Problem 2:
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 percent debt will be maintained. Interest in the fourth year will be $1.472 million after which interest and the tax shield will grow at 5 percent. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and then $3.57 million, after which the free cash flows will grow at a 5 percent rate. What is the unlevered value of Vandell and what is the value of its tax shields? What is the per share value of Vandell to Hastings Corporation? Assume Vandell now has $10.82 million in debt.