Question

Based on its growth prospects, a private investor values a local bakery at $750,000. She believes that cost savings having a present value of $50,000 can be achieved by changing staffing levels and store hours. Based on recent empirical studies, she believes the appropriate liquidity discount is 20 percent. A recent transaction in the same city required the buyer to pay a 5 percent premium to the asking price to gain a controlling interest in a similar business. What is the most she should be willing to pay for a 50.1 percent stake in the bakery

Answer 1

Answer:

the maximum that paid to acquire bakery is $336,672.

Explanation:

The computation is shown below;

= (Value of local bakery + Present value of cost savings) × (1 - discount) × ( 1 + premium) × willing stake of bakery

= ($750,000 + $50,000) × (1 - 0.20) ×  (1 + 0.05) × 0.501

= $336,672

Therefore, the maximum that paid to acquire bakery is $336,672.

We simply applied the above formula