Schultz Industries is considering the purchase of Arras Manufacturing. Arras is

Question

Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $8.0 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Schultz and Arras is 13 percent and 11 percent, respectively. Arras currently has 3 million shares of stock outstanding and $25 million in debt outstanding.

What is the maximum price per share Schultz should pay for Arras?

Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquisition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $8.0 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Schultz and Arras is 13 percent and 11 percent, respectively. Arras currently has 3 million shares of stock outstanding and $25 million in debt outstanding.

What is the maximum price per share Schultz should pay for Arras?

Explanation / Answer

Value of future cash outflow =

Terminal value = 12.31 (1.06) /( .11- .06)

                    = 13.05 / .05

                    = $ 261

Value of arras based on Cash flow = 192.7743

Less:Value of debt = $25

Value of equity = $ 167.7743

so Price per share = 167.7743/ 3

                           = $ 55.92 per share is a maximum price to be pay for arras

cash flow Present value factor@11% present value of cash flows 8 (1.09) = 8.72 .90090 7.8558 8.72(1.09) = 9.50 .81162 7.7104 9.50(1.09)= 10.36 .73119 7.5751 10.36(1.09) = 11.29 .65873 7.4371 11.29(1.09) = 12.31 .59345 7.3054

Terminal value = 12.31 (1.06) /( .11- .06)

                    = 13.05 / .05

                    = $ 261

.59345 154.8905 Value of cash flow 192.7743 million

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