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Lyrx [107]
3 years ago
5

Schultz Industries is considering the purchase of Arras Manufacturing. Arras is currently a supplier for Schultz, and the acquis

ition would allow Schultz to better control its material supply. The current cash flow from assets for Arras is $7.6 million. The cash flows are expected to grow at 5 percent for the next five years before leveling off to 2 percent for the indefinite future. The cost of capital for Schultz and Arras is 9 percent and 7 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
Business
1 answer:
Aleksandr [31]3 years ago
7 0

Answer:

$50.67 per share

Explanation:

using the discounted cash flow model, we can determine Arras's total value:

CF₀ = $7.6

CF₁ = $7.98

CF₂ = $8.379

CF₃ = $8.79795

CF₄ = $9.2378475

CF₅ = $9.699739875

CF₆ = $9.893734673

we must first find the terminal value at year 5 = $9.893734673 / (7% - 2%) = $197.874694

now we can discount the future cash flows:

firm's value = $7.98/1.07 + $8.379/1.07² + $8.79795/1.07³ + $9.2378475/1.07⁴ + $9.699739875/1.07⁵ + $197.874694/1.07⁵ = $7.458 + $7.319 + $7.182 + $7.048 + $6.916 + $141.081 = $177.004 million

the shareholders' share of the firm's value = $177.004 million - $25 million = $152.004 million

price per share = $152.004 million / 3 million shares = $50.668 ≈ $50.67 per share

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Answer:

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1. Acme Company

Balance Sheet

As of January 6, 2021 (amounts in thousands)

Cash                                         13,819

Accounts Receivable                3,188

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Property Plant & Equipment 15,445

Other Assets                             800

Total Assets                         38,352  

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Other Liabilities                      900

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Acme Company

Balance Sheet

As of January 5, 2021 (amounts in thousands)

Cash                                        13,700

Accounts Receivable              3,200

Inventory                                  5,100

Property Plant & Equipment 15,400

Other Assets                             800

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Debt                                      3,600

Other Liabilities                      900

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2. Equipment $45 Cash $45

3. Cash $85 Paid-in Capital $85

4. Cash $67 Bank payable $67

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Accounts receivable        12

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4. Bank payable             67

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