pvt_company_valuation - Private Company Valuation Aswath...

Info iconThis preview shows pages 1–7. Sign up to view the full content.

View Full Document Right Arrow Icon
Aswath Damodaran 179 Private Company Valuation Aswath Damodaran
Background image of page 1

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
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.
Background image of page 2
Aswath Damodaran 181 Estimating Cost of Equity for a Private Firm n Most models of risk and return (including the CAPM and the APM) use past prices of an asset to estimate its risk parameters (beta(s)). n Private firms and divisions of firms are not traded, and thus do not have past prices. n Thus, risk estimation has to be based upon an approach that does not require past prices
Background image of page 3

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 182 I. Comparable Firm Betas n Collect a group of publicly traded comparable firms, preferably in the same line of business, but more generally, affected by the same economic forces that affect the firm being valued. A Simple Test: To see if the group of comparable firms is truly comparable, estimate a correlation between the revenues or operating income of the comparable firms and the firm being valued. If it is high (and positive), of course, your have comparable firms. n If the private firm operates in more than one business line collect comparable firms for each business line
Background image of page 4
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.
Background image of page 5

Info iconThis preview has intentionally blurred sections. Sign up to view the full version.

View Full DocumentRight Arrow Icon
Aswath Damodaran 184 Accounting Betas n Step 1: Collect accounting earnings for the private company for as long as there is a history. n period. n Step 3: Regress changes in earnings for the private company against n
Background image of page 6
Image of page 7
This is the end of the preview. Sign up to access the rest of the document.

Page1 / 55

pvt_company_valuation - Private Company Valuation Aswath...

This preview shows document pages 1 - 7. Sign up to view the full document.

View Full Document Right Arrow Icon
Ask a homework question - tutors are online