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 $7.6 million. The cash flows are expected to grow at 5 percent for the next five years before leveling off to 2 percent for the indefinite future. The cost of capital for Schultz and Arras is 9 percent and 7 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

firm value of Arras=(7.6*1.05^1)/1.07^1+(7.6*1.05^2)/1.07^2+(7.6*1.05^3)/1.07^3+(7.6*1.05^4)/1.07^4+(7.6*1.05^5)/1.07^5+((7.6*1.05^5*1.02)/(7%-2%))/1.07^5

=177.00 million

maximum price per share Schultz should pay for Arras=(177-25)/3

=50.67

the above is the answer

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