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1) Vandell’s free cash ow (FCF0) is $2 million per year and is expected to grow at aconstant rate of ! a year" its #eta is 1% &hat is the 'ale of Vandell’s operations*f Vandell has $10+2 million in de#t, what is the crrent 'ale of Vandell’s stoc-

(.int/ se the corporate 'alation model)’

2) estimates that if it acires Vandell, interest payments will #e $1,00,000per year for years, after which the crrent target capital strctre of 0! de#twill #e maintained *nterest in the forth year will #e $1%32 million, after whichinterest and the tax shield will grow at ! 4ynergies will case the free cash owsto #e $2 million, $25 million, $% million, and $3 million in 6ears 1 throgh %,respecti'ely, after which the free cash ows will grow at a ! rate &hat is thenle'ered 'ale of Vandell, and what is the 'ale of its tax shields &hat is the pershare 'ale of Vandell to .astings Corporation 7ssme that Vandell now has

$10+2 million in de#t

) 8arston 8ar#le Corporation is considering a merger with the Conroy ConcreteCompany Conroy is a p#licly traded company, and its #eta is 10 Conroy has#een #arely pro9ta#le, so it has paid an a'erage of only 20! in taxes dring the last se'eralyears *n addition, it ses little de#t" its target ratio is :st 2!, with the costof de#t 5!*f the acisition were made, 8arston wold operate Conroy as a separate, whollyowned s#sidiary 8arston wold pay taxes on a consolidated #asis, and the tax ratewold therefore increase to ! 8arston also wold increase the de#t capitali;ationin the Conroy s#sidiary to wd < %0!, for a total of $2223 million in de#t #y theend of 6ear %, and pay 5! on the de#t 8arston’s acisition department estimatesthat Conroy, if acired, wold generate the following free cash ows and interest

expenses (in millions of dollars) in 6ears 1=/

 6ear Free Cash Flows *nterest >xpense1 $10 $122 10 13 13 2+% 200 21 212

*n 6ear , Conroy’s interest expense wold #e #ased on its #eginning?of?year (that is,the end?of?6ear?%) de#t, and in s#seent years #oth interest expense and free cashows are pro:ected to grow at a rate of @!

 Ahese cash ows inclde all acisition eBects 8arston’s cost of eity is 10!,its #eta is 10, and its cost of de#t is 5! Ahe ris-?free rate is @!, and the mar-etris- premim is %!a &hat is the 'ale of Conroy’s nle'ered operations, and what is the 'ale of Conroy’s tax shields nder the proposed merger and 9nancing arrangements# &hat is the dollar 'ale of Conroy’s operations *f Conroy has $10 million inde#t otstanding, how mch wold 8arston #e willing to pay for Conroy

4) Spreadsheet Problem( Use Attached spreadsheet to answer)

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4tart with the partial model in the 9le Ch22 0 Dild a 8odelxls on the text#oo-’s&e# site Echon *ndstries had the following #alance sheet at the time it defaltedon its interest payments and 9led for liidation nder Chapter 3 4ale of the 9xedassets, which were pledged as collateral to the mortgage #ondholders, #roght in$500 million, while the crrent assets were sold for another $%01 million Ahs, thetotal proceeds from the liidation sales were $1,00 million Ahe trstee’s costs

amonted to $1 million" no single wor-er was de more than $2,000 in wages" andthere were no nfnded pension plan lia#ilities Eetermine the amont a'aila#le fordistri#tion to shareholders and all claimants

Duchon Industries’s Balance Sheets (Millions of Dollars)Crrent assets $ %00 7cconts paya#le $ 0et 9xed assets @00 7ccred taxes %0  7ccred wages 0  otes paya#le 1+0  otal current liabilities ! "##  First?mortgage #ondsa 00  4econd?mortgage #ondsa 200  Ee#entres 200  4#ordinated de#entres# 100  Common stoc- 0  Getained earnings (10)  otal assets !$,### otal claims !$###