Assuming the same information as for Problem 22-2, suppose Hastings will increase Vandell ’ s…
Assuming the same information as for Problem 22-2, 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% debt. Assume that with this higher level of debt the interest rate would be 8.5%, and assume that interest payments in Year 4 are based on the new debt level from the end of Year 3 and a new interest rate. Again, free cash flows and tax shields are projected to grow at 5% after Year 4. What are the values of the unlevered firm and the tax shield, and what is the maximum price that Hastings would bid for Vandell now?