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 $6.6 million. The cash flows are expected to grow at 7 percent for the next five years before leveling off to 4 percent for the indefinite future. The cost of capital for Schultz and Arras is 11 percent and 9 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?

Answer 1

CF0 = 6.6 Millon

CF1 = 6.6*1.07 = 7.062

CF2 = 7.062*1.07 = 7.556

CF3 = 7.556*1.07 = 8.085

CF4 = 8.085 *1.07 = 8.651

CF5 = 8.651*1.07 = 9.257

CF6 = 9.257*1.04 = 9.627

Horzon value at the year 5 = Cf6/(r-g) = 9.627/(0.09-0.04) = 192.5423

Present value of Aras = 7.062/1.09 + 7.556/1.09^2 + 8.085/1.09^3 + 8.651/1.09^4 + 9.257/1.09^5 + 192.5423/1.09^5 = 156.366 Million

Value of Aras less thed ebt = 156.366 - 25 = 131.366 Million

Price per share of Aras = 131.366/3 = $43.788/share

The price Shultz should pay per share of Aras = $43.79/share