please show work. will thumbs up Schultz Industries is considering the purchase

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please show work. will thumbs up

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 $7 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 answer to 2 decimal places, e.g., 32.16.)

Explanation / Answer

Step-1:Calculation of total value of Arras Manufactuirng a. Present Value of next 5 years cash flow Year Cash flow Discount factor @ 10% Present Value 1 $            75,60,000.00                                                        0.9091 $       68,72,727.27 2 $            81,64,800.00                                                        0.8264 $       67,47,768.60 3 $            88,17,984.00                                                        0.7513 $       66,25,081.89 4 $            95,23,422.72                                                        0.6830 $       65,04,625.86 5 $        1,02,85,296.54                                                        0.6209 $       63,86,359.93 Total $    3,31,36,563.55 b. Terminal Value of cash flow Terminal Value = C5*(1+g)/(Ke-g) Where, = 10285296.54*(1+0.05)/(0.10-0.05) C5 $ 1,02,85,296.54 = $                                  21,59,91,227.29 Ke 10% g 5% c. Present value of terminal value = $                                  21,59,91,227.29 x                        0.6209 = $                                  13,41,13,558.62 d. Total Value of present value of cash flow = $                                    3,31,36,563.55 + $ 13,41,13,558.62 = $                                  16,72,50,122.17 According to discounted cash flow method, value of firm is the present value of cash flow from firm. So, Value of Arras manufacturing is $                                  16,72,50,122.17 Step-2:calculation of Value of shares of Arras Total Value of Arras Manufacturing $                                  16,72,50,122.17 Less: Outstanding Debt $                                    2,50,00,000.00 Total Values of shares of stock $                                  14,22,50,122.17 Step-3:calculation of value of per share Total Values of shares of stock a $                                  14,22,50,122.17 Number of shares outstanding b                                                  30,00,000 Value per share a/b $ 47.42 So, Schultz should pay maximum per share of Arras Manufacturing $ 47.42

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