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 $6.5 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 answer to 2 decimal places, e.g., 32.16.)

Answer 1

Present Value of Cash Inflow @ 12%

Cash Flow 1 = 6.5(1+0.08) = 7.02 mn

Cash Flow 2 = 7.02(1+0.08) = 7.5816 mn

Cash Flow 3 = 7.5816(1+0.08) = 8.188128 mn

Cash Flow 4 = 8.188128(1+0.08) = 8.84317824 mn

Cash Flow 5 = 8.84317824(1+0.08) = 9.5506324992 mn

=

=

= 110.47 Mn

Enterprise Value = 110.47 mn

Equity Value = Enterprise Value - Debt Value

=110.47 - 25

= 85.47 mn

Value per share = 85.47 mn / 3 mn = 28.49 per share

Minimum of 28.49 per share should be paid to Arras Manufacturing's shareholders.