FI516_Homework6_BrianLin - Brian Lin D01278742 Week 6...

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Brian Lin D01278742 Week 6 Homework Chapter 21 Questions Problem 21-1 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 (1-T) + w s r s = 30%(8%)(1-40%) + 70%(13.4%) = 10.82% V op = FCF0(1+g)/WACC-g 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 21-2 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% 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. What is the unlevered value of Vandell, and what is the value of its tax shields?
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This note was uploaded on 10/13/2011 for the course MAFM FI516 taught by Professor Anthonycriniti during the Spring '10 term at Keller Graduate School of Management.

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FI516_Homework6_BrianLin - Brian Lin D01278742 Week 6...

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