Estimate the value of a privately held firm based on the following information: total market value (or capitalization value)of a comparable firm = $200,000; net income of the comparable firm = $40,000; number of shares outstanding for the comparable firm = 20,000; net income for the target firm = $15,000; and number of shares outstanding for the target firm = 10,000.

Question

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The comparable firm has a market value of $200,000 and a net income of $40,000. This means that the comparable firm has a price-to-earnings (P/E) ratio of $200,000/$40,000 = 5. The target firm has a net income of $15,000. If the target firm has the same P/E ratio as the comparable firm, then the target firm's market value would be $15,000 * 5 = $75,000. However, the target firm has only 10,000 shares outstanding, while the comparable firm has 20,000 shares outstanding. This means that the target firm's per-share market value would be $75,000/10,000 = $7.50.

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