Firm Valuation 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 million. The cash flows are expected to grow at 9 percent for the next five years before leveling off to 6 percent for the indefinite future. The cost of capital for Schultz and Arras is 13 percent and 11 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 $

$143,212,559.75

Step-by-step explanation:

Given:

Current cash flow = $7.1 million.

Growth rate = 7% for 5 years before leveling off to 4% for the indefinite future.

Costs of capital

For Schultz = 11%

For Arras = 9%

Arras shares = 3 million in stock outstanding

Arras Shares $25 million in debt outstanding.

Price per share in year 1 is calculated as follows;

$7.1 million (1 + 7%)

= $7100000 * 107%

= $7,100,000 * 1.07

= $7,597,000

In year 2;

= $7,597,000 * (1 + 7%)

= $7,597,000 * 107%

= $7,597,000 * 1.07

= $8,128,790

In year 3;

= $8,128,790 * (1 + 7%)

= $8,128,790 * 107%

= $8,128,790 * 1.07

= $8,697,805.3

In year 4:

= $8,697,805.3 * (1 + 7%)

= $8,697,805.3 * 107%

= $8,697,805.3 * 1.07

= $9,306,651.671

In year 5;

= $9,306,651.671 * (1 + 7%)

= $9,306,651.671 * 107%

= $9,306,651.671 * 1.07

= $9,958,117.288

In year 6;

= $9,958,117.288 * (1 + 4%)

= $9,958,117.288 * 104%

= $9,958,117.288 * 1.04

= $10,356,441.979

Next, we'll calculate the terminal value in Year 5 since the cash flows begin a perpetual growth rate. Since we are valuing Arras, The cost of capital for Schultz is irrelevant in this case.

So, the terminal value is:

TV5= CF6/ (RWACC– g)

TV5= $10,356,441.979 / (.09 – .04)

TV5 = $10,356,441.979 / (.05

TV5= $207,128,839.59

Next, we calculate the discount for each flows, using the cost of capital for Arras, we find the value of the company today is:

V0= $7,597,000 / (1+.09) + $8,128,790 / (1 + .09)² + $8,697,805.3 / (1 + .09)³+ $9,306,651.671 /(1 + .09)⁴+ ($9,958,117.288 + $207,128,839.59) /(1 + .09)^5

V0= $168212559.7539011

V0 = $168212559.75

The market value of the equity is the market value of the company minus the market value of the debt, or:

S= $168212559.75 – $25,000,000 S=$143,212,559.75

21

step-by-step explanation:

inverse operation of addition