Brian Lin
D01278742
Week 6 Homework
Chapter 21 Questions
Problem 211
Vandell’s free cash flow (FCF
0
) is $2M per year and is expected to grow at a constant rate
of 5% a year; its beta is 1.4.
What is the current value of Vandell’s operations?
If Vandell
has $10.82M in debt, what is the current value of Vandell’s stock?
(Hint: Use the corporate
valuation model from Chapter 13.)
r
s
= r
RF
+ RP
M
(b)
= 5% + 6% (1.4)
= 13.4%
WACC= w
d
r
d
(1T) + w
s
r
s
= 30%(8%)(140%) + 70%(13.4%)
= 10.82%
V
op
= FCF0(1+g)/WACCg
V
op
= $2.1/(10.82%5%)
V
op
= $36.08M
V
S
= Vop – Debt
V
S
= 36.08 – 10.82
= 25.26M
P
0
= 25.26M/1M shares
P
0
= $25.26 per share
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Problem 212
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 $1.472M, after which interest and the tax shield will grow
at 5%.
Synergies will cause the free cash flows to be $2.5M, $2.9M, $3.4M, and $3.57M in
Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate.
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 Spring '10
 ANTHONYCRINITI
 tax shield, Conroy

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