a)
To determine: The company V’s pre-acquisition levered
a)
Explanation of Solution
The computation of company V’s pre-acquisition levered cost of equity and unlevered cost of equity is as follows:
Current b = 1.4; rRF = 5%; RPM = 6%; current wd = 30%; T = 40%; rd = 8%,
Hence, the levered cost of equity and unlevered cost of equity is 13.4% and 11.78% respectively.
b)
To determine: The unlevered value of operations.
b)
Explanation of Solution
The computation of unlevered value of operation is as follows:
Hence, the unlevered value of operation is $44.69.
c)
To determine: The value of tax shield.
c)
Explanation of Solution
The computation of value of tax shield is as follows:
Hence the value of tax shield is $7.67million.
d)
To determine: The total intrinsic value of operations, intrinsic value of company V’s equity to company H and company V’s intrinsic stock price per share.
d)
Explanation of Solution
The computation of total value of operation is as follows:
Hence the total value of operation is $52.36 million.
The computation of equity value to acquirer is as follows:
Hence, the equity value of company V to company H is $41.54million.
The computation of intrinsic stock price per share is as follows:
Hence, the intrinsic stock price per share is $41.54per share.
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Chapter 26 Solutions
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- Hasting Corporation is interested in acquiring Vandell Corporation. Vandell has 1.5 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.19 million in debt that trades at par and pays an 8% interest rate. Vandell’s current free cash flow (FCF0) is $2 million per year and is expected to grow at a constant rate of 5% a year. Vandell pays a 25% combined federal-plus-state tax rate, the same rate paid by Hastings. The risk-free rate of interest is 5%, and the market risk premium is 6%. Hasting’s first step is to estimate the current intrinsic value of Vandell. What is Vandell’s cost of equity? What is its weighted average cost of capital? What is Vandell’s intrinsic value of operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.) Based on this analysis, what is the minimum stock price that Vandell’s shareholders should accept?arrow_forwardXYZ Corporation arranged a repurchase agreement in which it purchasedsecurities for $4.9 million and will sell the securities back for $5.5 million in 40 days.What is the yield to XYZ Corporation?arrow_forwardVanderley Industries Ltd is currently valued at $900 million. Management is planning to repurchase $400 million of its issued shares by issuing non-maturing debt at a 5 per cent annual interest rate. Vanderley Industries is subject to a 30 per cent tax rate. Given all of the Modigliani and Miller assumptions, except the assumption that there is no tax, what value will Vanderley Industries have after the capital restructurearrow_forward
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