Cost of Capital: Applications and Examples, + Website, 5th Edition

CHAPTER 27

Cost of Capital for Closely Held Businesses

Kimberly Linebarger

Introduction

The Capital Markets

Cost of Capital Surveys

Pepperdine PCMP

PitchBook

PricewaterhouseCoopers

S&P Capital IQ

Using Private Capital Markets Data

The Private Cost of Capital Model

The Implied Private Company Pricing Line

Total Beta

Summary

INTRODUCTION

The two commonly used models to estimate the cost of capital for discounting or capitalizing expected net cash flows for a closely held business are the build-up method (Formula 9.1) and the modified version of the capital asset pricing model (CAPM) (Formula 10.6). In applying either of these methods for closely held businesses, analysts have typically had to rely on data derived from publicly traded companies to arrive at a cost of capital. Many analysts believe that the inherent differences between closely held companies and public companies make the use of the build-up and modified CAPM, which rely on data from public companies, to be a less reliable estimate of the cost of capital for a closely held business, and that an analyst must look to the private capital markets to better estimate the cost of capital for a closely held business.

This chapter focuses on the sources of capital market data for closely held businesses and discusses their usefulness for estimating the cost of capital for a closely held business.

THE CAPITAL MARKETS

Instruments within both the private capital markets (sources of capital for investments in closely held businesses) ...