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 $7.4 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Price per share

$   

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 $7.4 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? (Do not round intermediate calculations and round your final answer to 2 decimal places. (e.g., 32.16))

Explanation / Answer

PV factor Present Year Cashflows at 13% Value 1 $    7,400,000.00 0.884956 $    6,548,672.57 2 $    8,066,000.00 0.783147 $    6,316,861.15 3 $    8,791,940.00 0.69305 $    6,093,255.44 4 $    9,583,214.60 0.613319 $    5,877,564.99 5 $ 10,445,703.91 0.54276 $    5,669,509.59 6 $ 11,385,817.27 0.480319 $    5,468,818.98 Total $ 35,974,682.71 Present Value of Cashinflows $ 35,974,682.71 Less: Outstanding Debts $ 25,000,000.00 Amount of Equity in Arras $ 10,974,682.71 No of Shares outstanding 3000000 Price per share $                     3.66

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