A buyer approached you and expressed his interest in buying your firm. The buyer estimates that your firm is worth $10 million. However, your estimation of your firm's value is $12 million. Based on your knowledge, sales growth is most likely to be 12 percent per year, and you expect the EBITDA to sales ratio to be 10 percent. However, the buyer estimates that sales growth will be 10 percent and expects the EBITDA to sales ratio to be 8 percent. Both agree on a 6 percent discount rate, and your firm's sales for the current year is $55 million. To bridge the gap between you and the buyer, both agree on an earnout plan with the following terms: You will get $5 million now plus an earnout. The earnout is based on your firm's EBITDA for the next three years. The earnout contract is as follows: the earnout thresholds are $2 million, $4 million, and $6 million, respectively, for the first, second, and third years (i.e., you get paid all the EBITDA above the thresholds). What is the offer's value from the seller's perspective? Give your answer without the $ sign and in Million
A buyer approached you and expressed his interest in buying your firm. The buyer estimates that your firm is worth $10 million. However, your estimation of your firm's value is $12 million. Based on your knowledge, sales growth is most likely to be 12 percent per year, and you expect the EBITDA to sales ratio to be 10 percent. However, the buyer estimates that sales growth will be 10 percent and expects the EBITDA to sales ratio to be 8 percent. Both agree on a 6 percent discount rate, and your firm's sales for the current year is $55 million. To bridge the gap between you and the buyer, both agree on an earnout plan with the following terms: You will get $5 million now plus an earnout. The earnout is based on your firm's EBITDA for the next three years. The earnout contract is as follows: the earnout thresholds are $2 million, $4 million, and $6 million, respectively, for the first, second, and third years (i.e., you get paid all the EBITDA above the thresholds). What is the offer's value from the seller's perspective? Give your answer without the $ sign and in Million
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
Related questions
Question
Transcribed Image Text:A buyer approached you and expressed his interest in buying your firm. The buyer
estimates that your firm is worth $10 million. However, your estimation of your
firm's value is $12 million. Based on your knowledge, sales growth is most likely to
be 12 percent per year, and you expect the EBITDA to sales ratio to be 10 percent.
However, the buyer estimates that sales growth will be 10 percent and expects the
EBITDA to sales ratio to be 8 percent. Both agree on a 6 percent discount rate, and
your firm's sales for the current year is $55 million.
To bridge the gap between you and the buyer, both agree on an earnout plan with
the following terms: You will get $5 million now plus an earnout. The earnout is
based on your firm's EBITDA for the next three years.
The earnout contract is as follows: the earnout thresholds are $2 million, $4
million, and $6 million, respectively, for the first, second, and third years (i.e., you
get paid all the EBITDA above the thresholds).
What is the offer's value from the seller's perspective? Give your answer without
the $ sign and in Million
AI-Generated Solution
AI-generated content may present inaccurate or offensive content that does not represent bartleby’s views.
Unlock instant AI solutions
Tap the button
to generate a solution
Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education