The owners of Arthouse Inc., a national artist supplies chain, are contemplating purchasing Craftworks Inc, a smaller chain.Arthouse's analysts project that the merger will result in incremental free flows and interest tax savings with a combined present value of $72.52 million, and they have determined that the appropriate discount rate for valuing Craftworks is 16%.Craftworks has 4 million shares outstanding and no debt.Craftworks' current price is $16.25.What is the maximum price per share that Arthouse should offer?

Question

Quizplus · Accepted Answer

The maximum price per share Arthouse should offer is calculated by adding the present value of the incremental free flows and interest tax savings to the current market capitalization of Craftworks, then dividing by the number of shares. The calculation is: (4 million shares * $16.25 + $72.52 million) / 4 million shares = $18.13.

The Owners of Arthouse Inc