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 $6.8 million. The cash flows are expected to grow at 8% for the next 5 years before leveling off to 4% for the indefinite future. The cost of capital for Shultz and Arras is 12% and 10%, respectively. Arras currently has 2.4 million shares of stock outstanding and $25 million in debt outstanding. What is the maximum price per share Schultz should pay for Arras?

Required:

1. First calculate the annual cash flows for years 1 through 6:

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

2. Calculate the terminal value in year 6, since that is when cash flows become perpetual.

TV5 = CF6/(RWACC g)

Terminal Value =

3. Discount the cash flows for the 5 years plus the terminal value back to today. The total is equal to the market value of the company.

Year 1

Year 2

Year 3

Year 4

Year 5

MV of Company =

4. Calculate the market value of equity and price per share.

MV of equity =

Price per share =