Question #31
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 17
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
An analyst is valuing a private firm on the behalf of a strategic buyer and deflates the average public company multiple by 15% to account for the higher risk of the private firm. Given the following figures, calculate the value of firm equity using the guideline public company method (GPCM). Market value of debt $4,100,000 Normalized EBITDA $42,800,000 Average EV/EBITDA multiple 8.5 Control premium from past transaction 25% The enterprise value of the firm is closest to:
Answer Choices:
A. $386,484,000
B. $304,060,000
C. $382,384,000
Explanation
The adjustment to the EV/EBITDA multiple for the higher risk of the private firm is 8.5 × (1
− 0.15) = 7.225. Given that the buyer is a strategic buyer, a control premium adjustment
should be made. Adjusted multiple = 7.225 × (1.25) = 9.03.
EV = 9.03 × $42,800,000 = $386,484,000.
Subtracting out the debt results in the equity value:
$386,484,000 − $4,100,000 = $382,384,000