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Hastings Corporation is interested in acquiring VandellCorporation. Vandell has 1 million shares outstanding and a targetcapital structure consisting of 30% debt; its beta is 1.25 (givenits target capital structure). Vandell has $9.95 million in debtthat trades at par and pays an 7% interest rate. Vandell’s freecash flow (FCF0) is $1 million per year and is expected to grow ata constant rate of 5% a year. Vandell pays a 30% combined federaland state tax rate. The risk-free rate of interest is 3% and themarket risk premium is 7%. Hastings’ first step is to estimate thecurrent intrinsic value of Vandell.

A) What are Vandell’s cost of equity and weighted average costof capital? Round your answer to two decimal places. Do not roundintermediate calculations.

Cost of equity: ______%

WACC: _____%

B) What is Vandell's intrinsic value of operations? (Hint: Usethe free cash flow corporate valuation model.) Round your answer totwo decimal places. Do not round intermediate calculations.

_____$ million

C) What is the current intrinsic value of Vandell's stock? Roundyour answer to the nearest cent. Do not round intermediatecalculations.

$_____ /share

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Collen Von
Collen VonLv2
28 Sep 2019

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Hastings Corporation is interested in acquiring VandellCorporation. Vandell has 1 million shares outstanding and a targetcapital structure consisting of 30% debt; its beta is 1.30 (givenits target capital structure). Vandell has $8.35 million in debtthat trades at par and pays an 7.6% interest rate. Vandell’s freecash flow (FCF0) is $2 million per year and is expected to grow ata constant rate of 6% a year. Vandell pays a 35% combined federaland state tax rate. The risk-free rate of interest is 3% and themarket risk premium is 4%. Hastings’ first step is to estimate thecurrent intrinsic value of Vandell.

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Indicate the range of possible prices that Hastings could bidfor each share of Vandell common stock in an acquisition. Roundyour answers to the nearest cent. Do not round intermediatecalculations.

The bid for each share should range between $ per share and $per share.

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