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 $8.4 million. The cash flows are expected to grow at 8 percent for the next five years before leveling off to 5 percent for the indefinite future. The cost of capital for Schultz and Arras is 12 percent and 10 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

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 $8.4 million. The cash flows are expected to grow at 8 percent for the next five years before leveling off to 5 percent for the indefinite future. The cost of capital for Schultz and Arras is 12 percent and 10 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

**Terminal value - 12.3424 (1+.05) /(.10 -.05)

                          = 12.3424 * 1.05 / .05

                          = 12.9595 /.05

                           = $ 259.19

so Value of Arras = $ 200.70

Less:Debt           = (25)

Value attributable to common stock(equity) = $ 175.70

Price per share = 175.70 / 3

                       = $ 58.57 per share

so maximum price schultz is ready to pay =$ 58.57 per share.

year cash flow present value @10% present value of cash flow 1 9.072       [8.4(1+.08)] .90909 8.2473 2 9.798       [9.072(1+.08)] .82645 8.0976 3 10.5816    [9.798(1+.08)] .75131 7.9501 4 11.4281    [10.5816(1+.08)] .68301 7.8055 5 12.3424    [11.4281(1+.08)] .62092 7.6636 5 terminal value 259.1904 .62092 160.9365 Present value of cash flow 200.70

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