BigCo's Chief Financial Officer Is Trying to Determine a Fair

Essay

BigCo's Chief Financial Officer is trying to determine a fair value for PrivCo, a non-publicly traded firm that BigCo's is
considering acquiring. Several of PrivCo's competitors, Ion International, and Zenon are publicly traded. Ion and Zenon have
price-to-earnings ratios of 20 and 15, respectively. Moreover, Ion and Zenon's shares are trading at a multiple of earnings
before interest, taxes, depreciation, and amortization (EBITDA) of 10 and 8, respectively. BigCo estimates that next year
PrivCo will achieve net income and EBITDA of $4 million and $8 million, respectively. To gain a controlling interest in the
firm, BigCo expects to have to pay at least a 30% premium to the firm's market value. What should BigCo expect to pay for
PrivCo?
a. Based on price-to-earnings ratios?
b. Based on EBITDA?