BigCo’s Chief Financial Officer is trying to determine a fair value for PrivCo,

Question

BigCo’s Chief Financial Officer is trying to determine a fair value for PrivCo, a non-publicly traded firm that BigCo’s is considering acquiring. Several of PrivCo’s competitors, Ion International, and Zenon are publicly traded. Ion and Zenon have price-to-earnings ratios of 30 and 25, respectively. Moreover, Ion and Zenon’s shares are trading at a multiple of earnings before interest, taxes, depreciation, and amortization (EBITDA) of 10 and 8, respectively. BigCo estimates that next year PrivCo will achieve net income and EBITDA of $5 million and $9 million, respectively. To gain a controlling interest in the firm, BigCo expects to have to pay at least a 20% premium to the firm’s market value. What should BigCo expect to pay for PrivCo?

Explanation / Answer

fair value is the value to the share where the buyer ready to buy the shares and the seller ready to exchange with a price. i.e. where both the parties are ready to exchange their holdings, where the buyer ready to pay funds, seller ready to transfer the shares.

here the expected Eearnings Before Interest and Taxes for next year will be aproximately $5 million and net income is $9 million. first we need to calculate the total firm value, and it has to divide with total number of shares, and Bigco firm has to take atleast 51% stake in Privco. for that they need to calculate the worth of 51% and along with it 20% aditional payment (premium) also should be done

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