Thank you! Schultz Industries is considering the purchase of Arras Manufacturing

Question

Thank you!

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

Value of Arras = 8.4*1.08/1.12 + 8.4*1.08^2/1.12^2 + 8.4*1.08^3/1.12^3 + 8.4*1.08^4/1.12^4 + 8.4*1.08^5/1.12^5 + 8.4*1.08^5*1.05/(.12 - .05)/1.12^5

= 142.76 Million OR 142759390

Value of equity = 142759390 - 25000000 = 117759390

Price per share to pay = 117759390 / 3000000

= 7.24

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