Based on its\' growth prospects, a private investor values a local bakery at $75

Question

Based on its' growth prospects, a private investor values a local bakery at $750,000. She believes that cost savings having a PV of $50,000 can be achieved by changing staffing levels and store hours. She believes the appropriate liquidity discount is 20%. A recent transaction in the same city required the buyer to pay a 5% premium to the average price for similar businesses to gain a controlling interest in a bakery. What is the most she should be willing to pay for a 50.1% stake in the bakery?

Explanation / Answer

Calculate the maximum value that paid for bakery = (Value of local bakery + PV of cost savings)*(1-discount)*(1+premium) * willing stake of bakery

= ($750,000+$50,000) * (1-0.20)* (1+0.05)*0.501

= $336,672

Therefore, the maximum that paid to acquire bakery is $336,672.

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