Solution:
a) Vandell's pre-acquisition levered cost of equity=5+1.4*6=13.40 | ||||
rSU=8.0*0.3+13.40*0.7=11.78% | ||||
b) Intrinsic unlevered value of operations(with synergy): | ||||
1 | 2 | 3 | 4 | |
FCF ($ million) | 2500000 | 2900000 | 3400000 | 3570000 |
pvif at 11.78% | 0.89461 | 0.80033 | 0.71599 | 0.64054 |
PV of horizon FCF | 2236536 | 2320971 | 2434370 | 2286714 |
Cummulative Pv of Horizon FCF | 9278591 | |||
Terminal value of FCF=3570000*1.05/(0.1178-0.05) | 55287611 | |||
PV of Terminal FCF=55287611*0.64054 | 35413708 | |||
Intrinsic unlevered value of operations | 44692299 | |||
c) CValue of tax shields | ||||
Interest | 1500000 | 1500000 | 1500000 | 1472000 |
tax shield at 40% | 600000 | 600000 | 600000 | 588800 |
pvif at 11.78% | 0.89461 | 0.80033 | 0.71599 | 0.64054 |
PV of Horizon tax shields | 536769 | 480201 | 429595 | 377148 |
Cummulative Pv of Horizon tax shields | 1823712 | |||
Terminal value of tax shield 588800*1.05/(0.1178-0.05) | 9118584 | |||
Pv of terminal tax shield=9118584*0.60621= | 5840782 | |||
value of tax shields at t=0 | 7664494 | |||
d) Total intrinsic value of operations | 52356793 | |||
(44692299+7664494) | ||||
value of debt | 10820000 | |||
Equity value to acquirer | 41536793 | |||
Number of shares | 1000000 | |||
Intrinsic Value per share of existing shares | $41.54 |
Q2 (20 points): Hasting Corporation estimates that if it acquires Vandell Corporation, synergies will cause Vandell's...
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