Answer:
Share price = $20.54
Explanation:
current cash flow from assets for Arras is $6,400,000 million
Seance the cash flows are expected to grow at 9 percent for the next five years, therefore, the next five years cash flow will be:
Year 1: $6,400,000*1.09 = $6,976,000
Year 2: $6,976,000*1.09 = $7,603,840
Year 3: $7,931,520*1.09 = $8,288,185.6
Year 4: $8,566,042*1.09 = $9,034,122.304
Year 5: $9,251,325(1 + .08) = $9,847,193.311
According to the question after five years the cash flows are expected to grow at 6 percent for the indefinite future.
Therefore, the cash flow of 6th year = $9,847,193.311*1.06 = $10,438,024.91
We know that terminal value of current year = Cash flow of next year/(WACC-g)
As after year 5 the cash flow will be grown at a specific rate for indefinite future, the terminal value 5th year = $10,438,024.91/(.11-.06) = 94,891,135.49.
Present value of the cash flow = $(6,976,000/1.11) + $(7,603,840/1.11^2) + $(8,288,185.6/1.11^3) + $(9,034,122.304/1.11^4) + $[(9,847,193.311+94,891,135.49)/1.11^5] = $86,624,537.47
The market value of the equity = Market value of the company's present cash flow - Market value of the debt
The market value of the equity = $86,624,537.47 - $25,000,000
The market value of the equity = $61,624,537.47
Therefore, the maximum price per share Schultz should pay for Arras,
Share price = $61,624,537.47/3,000,000
Share price = $20.54
