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Free cash flow, value of operations, share value, bid price

Hast is interested in acquiring Van. Van has 1 million shares outstanding and a target capital structure consisting of 30% debt. Van's debt interest is 8%. Assume that the risk-free rate of interest is 5% and the market risk premium is 6%. Both Hast and Van face a 40% tax rate.

Could you show me step by step showing all calculation in black font with my attached Excel spreadsheet?

1. Van's free cash flow (FCF o) is $ 2 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 Van's operations?

If Van has $10.82 million in debt, what is the current value of Van's stock? (Use the corporation valuation model)

2. Hast estimates that if it acquires Van, 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 the 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 million, in Years 1 through 4, after which the free cash flows will grow at a 5% rate.

What is the unlevered value of Van and what is the value of its tax shields?

What is the per share value of Van and Hast Corporation? Assume Van now has $10.82 million in debt.

3. On the basis of the data answers for the above 1 and 2, if Hast were to acquire Van, what would be the range of possible prices that it could bid for each share of Van common stock?

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Solution Summary

The solution explains the calculation of free cash flow, value of operations, per share value and bid price relating to the acquisition of Van by Hast