Week 6 Hmwk Solutions

# Week 6 Hmwk Solutions - Problem 25-1 Valuation: Vandell's...

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Problem 25-1 Valuation: Vandell’s free cash flow (FCF) is 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 operations? If Vandell has \$10.82 millions in debt, What is the current value of Vandell’s stock? (Hint: Use the corporate valuation model of ch-15) Use the corporate tax rate of 40%. FCF 1 = 2.00(1.05) = \$2.1 million; g = 5%; b = 1.4; r RF = 5%; RP M = 6%; w d = 30%; T = 40%; r d = 8% V ops = ? P 0 = ? r s = r RF + RP M (b) = 5% + 6%(1.4) = 13.4%. WACC = w d r d (1-T) + w s r s = 0.30(8%)(0.60) + 0.70(13.4%) = 10.82% V ops = = = \$36.08 million V S = V ops – debt = 36.08 – 10.82 = \$25.26 million Price = 25.26 million / 1 million shares = \$25.26 / share. Problem 25-2 Merger Valuation: Hastings estimates that if it acquires Vandells, 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 thee fourth year will be \$1.472 million , after which interest and the tax shield will grow at 5%. Synergies will cause the free cash flows to be \$2.5 million, \$2.9 million, \$3.4 million, and then \$3.57, in years 1 through 4. What is the unlevered value of Vandell to Hastings Corporation? Assume Vandell now has \$10.82 million in debt.

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FCF 1 = \$2.5 million, FCF 2 = \$2.9 million and FCF 3 = \$3.4 million; g = 5%; b = 1.4;
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## Week 6 Hmwk Solutions - Problem 25-1 Valuation: Vandell's...

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