The owners of Arthouse Inc., a national artist supplies chain, are contemplating

Question

The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing Craftworks Inc, a smaller chain. Arthouse's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Craftworks is 16%. Craftworks has 4 million shares outstanding and no debt. Craftworks' current price is $16.25. What is the maximum price per share that Arthouse should offer?

Explanation / Answer

Present value of cash flows = $ 72.52 million

Shares outstanding = 4 million

Price per share = 72.52/4 = $ 18.13

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