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 $7.3 million. The cash flows are expected to grow at 5 percent for the next five years before leveling off to 2 percent for the indefinite future. The cost of capital for Schultz and Arras is 9 percent and 7 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 $7.3 million. The cash flows are expected to grow at 5 percent for the next five years before leveling off to 2 percent for the indefinite future. The cost of capital for Schultz and Arras is 9 percent and 7 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

Arrars Discount rate 7% Year 0 1 2 3 4 5 6 CF 7.3 7.665 8.04825 8.450663 8.873196 181.0131908 Divedend discount model i.e. D*(1+GROWTH RATE)/(COST OF CAPITAL - GROWTH RATE) PV@7% 6.82243 6.694908 6.569769 6.44697 6.326466 120.6167321 Terminal Value NPV 153.4773 Million Debt 25 Million Value of equity 128.4773 Value of firm - value of debt No of shares 3 Million Price per share 42.82576 $

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.