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 $8.3 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 final answer to 2 decimal places. (e.g., 32.16))

Price per share = $_____

Answer 1

year	cash flow	PVF @ 9%	cash flow * PVF
1	8.3(1+.07)= 8.881	.91743	8.1477
2	8.881(1+.07)= 9.5027	.84168	7.9982
3	9.5027(1+.07)= 10.1679	.77218	7.8514
4	10.1679(1+.07)= 10.8796	.70843	7.7074
5	10.8796(1+.07)= 11.6412	.64993	7.5660
5,Terminal value	242.1370	.64993	157.3721
	Total present worth		196.6429

**Terminal value = CF5(1+g)/(Rs-g)

         = 11.6412(1+.04)/(.09-.04)

         = 11.6412*1.04/.05

= 242.1370.

value of equity = total present worth - value of debt

                    = 196.6429- 25

                       = 171.6429

price per share= value of equity /number of shares outstanding

              = 171.6429 / 3

                 = $ 57.21 per share/