Estimate the value of a privately-held firm based on the following information: stock price of a comparable firm = $20.00; net income of a comparable firm = $20,000; number of shares outstanding for the comparable firm = 10,000; and earnings per share for the target firm = $3.00.

Question

Quizplus · Accepted Answer

The price-to-earnings (P/E) ratio of the comparable firm is 10 ($20,000 net income / 10,000 shares = $2 EPS; $20 stock price / $2 EPS = 10 P/E). Applying this P/E ratio to the target firm with an EPS of $3.00 gives a value of $30.00 ($3.00 EPS * 10 P/E).

Estimate the Value of a Privately-Held Firm Based on the Following