pvt_company_valuation - Private Company Valuation Aswath Damodaran Aswath Damodaran 179 Process of Valuing Private Companies n Choosing the right model

# pvt_company_valuation - Private Company Valuation Aswath...

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Aswath Damodaran 179 Private Company Valuation Aswath Damodaran Aswath Damodaran 180 Process of Valuing Private Companies n Choosing the right model Valuing the Firm versus Valuing Equity Steady State, Two-Stage or Three-Stage n Estimating a Discount Rate Cost of Equity Estimating Betas Cost of Debt Estimating Default Risk Estimating an after-tax cost of debt Cost of Capital Estimating a Debt Ratio n Estimating Cash Flows n Completing the Valuation: Depends upon why and for whom the valuation is being done. Aswath Damodaran 181 Aswath Damodaran 182 Aswath Damodaran 183 Estimating comparable firm betas n Estimate the average beta for the publicly traded comparable firms. n Estimate the average market value debt-equity ratio of these comparable firms, and calculate the unlevered beta for the business. β unlevered = β levered / (1 + (1 - tax rate) (Debt/Equity)) n Estimate a debt-equity ratio for the private firm, using one of two assumptions: Assume that the private firm will move to the industry average debt ratio. The beta for the private firm will converge on the industry average beta. β private firm = β unlevered (1 + (1 - tax rate) (Industry Average Debt/Equity) n Estimate the optimal debt ratio for the private firm, based upon its operating income and cost of capital. β private firm = β unlevered (1 + (1 - tax rate) (Optimal Debt/Equity) n Step 5: Estimate a cost of equity based upon this beta. Aswath Damodaran 184 Accounting Betas n Step 1: Collect accounting earnings for the private company for as long as there is a history. n Step 2: Collect accounting earnings for the S&P 500 for the same time period. n Step 3: Regress changes in earnings for the private company against changes in the S&P 500. n Step 4: The slope of the regression is the accounting beta n There are two serious limitations - (a) The number of observations in the regression is small (b) Accountants smooth earnings. Aswath Damodaran 185 Estimating a Beta for the NY Yankees n You have three choices for comparable firms: Firms that derive a significant portion of their revenues from baseball  #### You've reached the end of your free preview.

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• Spring '11
• tnaga
• Net Present Value, Financial Ratio, new york yankees, Aswath Damodaran
• • • 