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 $7.8 million. The cash flows are expected to grow at 7 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 11 percent and 9 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.)

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 $7.8 million. The cash flows are expected to grow at 7 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 11 percent and 9 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.)

Explanation / Answer

Growth rate = (End value – Start value)/(Start value) using above formula calculate below                                                          0.070 growth rate                                                          1.100 discount rate                                                          0.040 growth rate cash flow year discount rate formula PV                                                546,000.00                                            8,346,000.00 1                                   2.100         3,974,285.71                                                584,220.00                                            8,930,220.00 2                                   4.410         2,024,993.20                                                625,115.40                                            9,555,335.40 3                                   9.261         1,031,782.25                                                668,873.48                                          10,224,208.88 4                                19.448            525,717.62                                                715,694.62                                          10,939,903.50 5                                40.841            267,865.65                                       273,497,587.49 perpetuity    265,531,638.34 CF/r-g    273,356,282.76 Total present value of all cash flows    (25,000,000.00) Debt    248,356,282.76 Total PV less Debt         3,000,000.00 no of shares $                   82.79 Schultz will pay per share

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