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Dear OTA, Please help me in finding with 3 highlighted problems in the attached file.
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Solution Summary
The solution explains three problems - 1. Calculation of value of Conroy Concrete Company for merger with Marston Marble. 2. Calculation of value of operations and current price of stock for Vadell. 3. Unlevered value of Vandell and value of tax shield for Vandell for merger with Hastings Corporation
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25-1 FCF1 = 2.00(1.05) = $2.1 million; g = 5%; b = 1.4; rRF = 5%; RPM = 6%; wd = 30%; T = 40%; rd = 8% Vops = ? P0 = ?
The value of operations is the present value of the cash flows. The cash flows are disdcounted at WACC to get the present value. We need to calculate the WACC.
We use the CAPM equation to calculate the cost of equity
rs = rRF + RPM(b)
= 5% + 6%(1.4)
= 13.4%.
WACC = wdrd(1-T) + wsrs
= 0.30(8%)(0.60) + 0.70(13.4%)
= 10.82%
Since the cash flows grow at a cosntant rate we use the constant growth formula
Vops =
=
= $36.08 million
VS = Vops - debt
= 36.08 - 10.82 = $25.26 million
Price = 25.26 million / 1 million shares
= $25.26 / share.
25-2 FCF1 = $2.5 million, FCF2 = $2.9 million, FCF3 = $3.4 million, and FCF4 = 3.57 million; Interest in the 4th year = $1.472 million. g = 5%; b = 1.4; rRF = 5%; RPM = 6%; wd = 30%; T = 40%; rd = 8% Vops = ? P0 = ?
In this case since the interest is separate, we need to calculate the unlevered value of operations and then add the interest shield. To calculate to unlevered value of operations we ...
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