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 $6.5 million. The cash flows are expected to grow at 8 percent for the next five years before leveling off to 5 percent for the indefinite future. The cost of capital for Schultz and Arras is 12 percent and 10 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.) Price per share

> This shit wrong, fool

Answer 1

Current cash flow $6.5 million

Step 1 - Assessment of future cash flows

Year 0	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6
6.5	6.5*1.08	6.5*(1.08)^2	6.5*(1.08)^3	6.5*(1.08)^4	6.5*(1.08)^5	9.55*(1.05)
6.5	7.02	7.58	8.19	8.84	9.55	10.03

Step 2 - Discounting of cash flow of year 1 to Year 5 basis the cost of capital of 12%

Year 1	Year 2	Year 3	Year 4	Year 5
7.02/1.12	7.58/(1.12)^2	8.18/(1.12)^3	8.84/(1.12)^4	9.55/(1.12)^5
6.27	6.04	5.82	5.62	5.42

Step 3 - Calculation of terminal value

Year 6

9.55^1.05

10.03

Terminal value

10.03/(0.12-0.05)

143.28

Step 4 Discounting of terminal value

Terminal value

143.28

Discounting

143.28/(1.12^5)

81.30

Step 5 - Present value of future cash flow

81.30+6.27+6.04+5.82+5.62+5.42 = $110.47 million

Step 6 - Deduct debt from the cash flow

110.47-25=$85.47 million

Step 7 - Divide the above book value by the share outstanding

85.47/3 = 28.49

Therefore, Schultz should pay $28.49 minimum which is the book value per share