Assuming the same information as for given Problem, suppose Hastings will increase Vandell's level of debt at the end of Year 3 to $30.6 million so that the target capital structure is now 45 percent debt. Assume that with this higher level of debt the interest rate would be 8.5 percent and that interest payments in Year 4 are based on the new debt level from the end of Year 3 and new interest rate. Again, free cash flows and tax shields are projected to grow at 5 percent after Year 4. What are the values of the unlevered firm and the tax shield, and what is the maximum price Hastings would bid for Vandell now?

Problem:
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 percent 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 percent. Synergies will cause the free cash flows to be $2.5 million, $2.9 million, $3.4 million, and then $3.57 million, after which the free cash flows will grow at a 5 percent 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 Vandell now has $10.82 million in debt.