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 for Arras is $7.5 million. The cash flows are expected to grow at 8 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 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?

How do you solve this problem only using a financial calculator?

Answer 1

value of Arras is

=(7.5*(1+8%)^1)/(1+10%)^1+(7.5*(1+8%)^2)/(1+10%)^2+(7.5*(1+8%)^3)/(1+10%)^3+(7.5*(1+8%)^4)/(1+10%)^4+(7.5*(1+8%)^5)/(1+10%)^5+((7.5*(1+8%)^5*(1+4%))/(10%-4%))/(1+10%)^5

=154.11 million

the maximum price per share Schultz should pay for Arras

=(value of Arras-value of debt)/number of shares

=(154.11-25)/3

=43.04

the above is answer..

such type of questions require more equation and calculations, thus can not be used using calculator directly