a- Acquirer Incorporated’s management believes that the most reliable way to value a potential target firm is by averaging multiple valuation methods, since all methods have their shortcomings. Consequently, Acquirer’s Chief Financial Officer estimates that the value of Target Inc. could range, before an acquisition premium is added, from a high of $700 million using discounted cash flow analysis to a low of $550 million using the comparable companies’ relative valuation method. A valuation based on a recent comparable transaction is $680 million. The CFO anticipates that Target Inc.’s management and shareholders would be willing to sell for a 25 percent acquisition premium, based on the premium paid for the recent comparable transaction. The CEO asks the CFO to provide a single estimate of the value of Target Inc. based on the three estimates. In calculating a weighted average of the three estimates, she gives a value of .4 to the recent transactions method, 3 to the DCF estimate, and .3 to the comparable companies’ estimate. What it weighted average estimate she gives to the CEO? Show your work.
b- Based on its growth prospects, a private investor values a local bakery at $850,000. She believes that cost savings having a present value of $40,000 can be achieved by changing staffing levels and store hours. Based on recent empirical studies, she believes the appropriate liquidity discount is 25 percent. A recent transaction in the same city required the buyer to pay a 6 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?