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 $6.6 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 costs of capital for Schultz and Arras are 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.)

Answer 1

Here we will use DCF technique to value the shares of Arras Manufacturing

Discounting Factor used is the Cost of capital of Arras as it is the company being acquired and is being valued.

Terminal growth rate used is 4% as given above.

From the calculated firm value we deduct debt to arrive at the Equity value

Attached is the solution in excel

Maximum price to be paid should $43.79 per share

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