Answer:
$143,212,559.75
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
