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 $7.7 million. The cash flows are expected to grow at 6 percent for the next five years before leveling off to 3 percent for the indefinite future. The cost of capital for Schultz and Arras is 10 percent and 8 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

Value of firm = 180.88

price per share = (180.88 - 25)/3 = 51.96

8.00% Cash flows Year Discounted CF                             -   0 0.00                         8.16 1 7.56                         8.65 2 7.42                         9.17 3 7.28                         9.72 4 7.15                      10.30 5 7.01                    212.27 5 144.47

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