Hastings Corporation is interested in acquiring Vandell’s Corporation. Vandell has 1 million shares outstanding and target capital structure consisting of 30% debt. Vandell’s debt interest rate is 8%. Assume that the risk free rate of interest is 5% and market risk premium is 6%. Both Hastings and Vandell’s face a 40% tax rate. Vandell’s Free Cash Flow is $2 Million per year and expected to grow at a constant rate of 5% a year; its beta is 1.4. What is the value of Vandell’s operation? If Vandell has 10.82 million in debt, what is the current value of Vandell’s stock?

Given that, Risk free rate of interest (Rf) = 5% , Market risk premium (Rm-Rf) = 6%.Beta(b) = 1.4, tax Rate = 40%, Growth rate = 5%.Thus Return on Equity (Re) = Rf + (Rm-Rf)*b = 5 + 6*1.4 =…