Assignment
Probem 1
Hastings estimates that if it acquires Vandell, 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 $3.57 million in Years 1 through 4, respectively, after which the free cash flows will grow at a 5% rate. What is the unlevered value of Vandell, and what is the value of its tax shields? What is the per share value of Vandell to Hastings Corporation? Assume that Vandell now has $10.82 million in debt
Problem 2
Southwestern Wear Inc. has the following balance sheet:
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Current assets
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$1,875,000
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Accounts payable
|
$375,000
|
|
Fixed assets
|
1,875,000
|
Notes payable
|
750,000
|
|
|
Subordinated debentures
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750,000
|
|
|
Total debt
|
$1,875,000
|
|
|
Common equity
|
1,875,000
|
|
Total assets
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$3,750,000
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Total liabilities and equity
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$3,750,000
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The trustee's costs total $216,000, and the firm has no accrued taxes or wages. Southwestern has no unfunded pension liabilities. The debentures are subordinated only to the notes payable. If the firm goes bankrupt and liquidates, how much will each class of investors receive if a total of $2.5 million is received from sale of the assets?