Question

You are interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, you estimate the value of the private company's stock to be $13.44 per share. You plan to acquire a majority of the shares in the company. The expected control premium is 12 percent, while the marketability discount for such a firm is 15 percent. The discount for the key person, one of the founders who may leave the firm upon your control of the firm, is 15 percent. What price should you be willing to pay for these shares

Answer 1

Answer:

$10.88

Explanation:

The value of private shares can be approximately gotten from various methods such as comparing valuation ratios, discounted flow analysis, net tangible assets, and so on.

Given that:

value of private company stock = $13.44 per share

Expected control premium = 12% = 0.12

Marketability discount = 15% = 0.15

Discount for key person = 15% = 0.15

Value per share = value of private company stock [(1 + expected control premium)(1 - Marketability discount) × (1 - discount for key person)]

= $13.44 [(1 + 0.12) × (1 - 0.15) × (1 - 0.15)]

= $10.88