Shuman Wolf Is Interested in Investing in a Private Company

question 54

Multiple Choice

Shuman Wolf is interested in investing in a private company. Based on earnings multiples of similar publicly traded firms, he estimates the value of the private company's stock to be $20 per share. He plans to acquire a majority of the shares in the company. The expected control premium is 9 percent. Shuman estimates the marketability discount for such a firm to be 11 percent. The discount for the key person, one of the founders who may leave the firm upon Shuman's control of the firm, is 19 percent. What price should he be willing to pay for these shares? (Round final answer to two decimal places.)

• A) $16.47 per share
• B) $31.45 per share
• C) $15.72 per share
• D) $32.94 per share

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Definitions:

Earnings Per Share

A financial metric calculated by dividing a company's net income by the number of its outstanding shares.

Dividend Per Share

The amount of dividend that is paid out for each share of stock held by shareholders.

Market Price

The current value at which an asset, commodity, or service can be bought or sold in a marketplace.

Price-earnings Ratio

A valuation ratio of a company's current share price compared to its per-share earnings, used to evaluate the attractiveness of a stock.