Schultz Industries is considering the purchase of Arras Manufacturing. Arras is
ID: 2762694 • 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 $7.9 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 final answer to 2 decimal places. (e.g., 32.16))
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 $7.9 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 final answer to 2 decimal places. (e.g., 32.16))
Explanation / Answer
Where
Cost of capital = 10.00% Year Previous year Cash flow Cash flow growth rate Cash flow current year stock price Total Value Discount factor Discounted value 1 7.9 8% 8.532 8.532 1.1 7.756363636 2 8.532 8% 9.21456 9.21456 1.21 7.615338843 3 9.21456 8% 9.9517248 9.9517248 1.331 7.476878137 4 9.9517248 8% 10.74786278 10.74786278 1.4641 7.340934898 5 10.74786278 8% 11.60769181 243.7615279 255.3692197 1.61051 158.5641938 Long term growth rate= 5% Value of FIRM = Sum of discounted value= 188.75 -Debt 163.75 /number of shares =Stock price 54.58Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.