Schultz Industries is considering the purchase of Arras Manufacturing. Arras is
ID: 2382530 • Letter: S
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 $8.0 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Schultz and Arras is 13 percent and 11 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 $8.0 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Schultz and Arras is 13 percent and 11 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
Calculation of present value of cash flows at 13%
Cash Flow at year 6 =13.04753/(0.13-0.06)
= CF5*(1+0.06)/(0.13-0.06)
VALUE= 125.4698
No of shares= 3 million
Price per share=41.82
1 8.72 0.8849 7.716328 2 9.5048 0.7831 7.443209 3 10.36023 0.693 7.179641 4 11.29265 0.6133 6.925784 5 12.30899 0.5427 6.68009 6 186.3933 0.4803 89.5247 Total 125.4698Related Questions
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