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.)

Question

Quizplus · Accepted Answer

First, we need to adjust the value of the company based on the control premium, which is 9%: 
$20 * 1.09 = $21.80 per share.

Then, we need to adjust for the marketability discount, which is 11%: 
$21.80 * 0.89 = $19.39 per share.

Finally, we need to adjust for the key person discount, which is 19%: 
$19.39 * 0.81 = $15.72 per share.

Therefore, Shuman should be willing to pay $15.72 per share for these shares. The correct answer is C.

Shuman Wolf Is Interested in Investing in a Private Company