Hastings Corporation is interested in acquiring Vandell Corporation. Vandell has 1 million shares outstanding and a target capital structure consisting of 30% debt; its beta is 1.4 (given its target capital structure). Vandell has $10.82 million in debt that trades at par and pays an 8% interest rate. Vandell’s 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 40% combined federal and state tax rate. The risk-free rate of interest is 5% and the market risk premium is 6%. Hastings’s first step is to estimate the current intrinsic value of Vandell.
a. What are Vandell’s cost of equity and weighted average cost of capital?
b. What is Vandell’s intrinsic value f operations? (Hint: Use the free cash flow corporate valuation model from Chapter 7.)
c. What is the current intrinsic value of Vandell’s stock?
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