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

CHAPTER 42

Cost of Capital for a Mid-Sized Company¹

Case Background

Valuation Procedures

Cost of Capital

Valuation of Contingent Liabilities

Letters of Credit

Guarantees

Conclusions

Appendix 42A: Report for Cost of Capital for a Mid-Sized Company

CASE BACKGROUND

This case study is a valuation of two equity interests in related entities. The investor owned an 82.6% controlling equity interest in ABC OpCo and owned a 92.5% controlling equity interest in RE HoldCo, both closely held companies. RE HoldCo was a real estate holding company whose sole holdings were buildings leased to ABC OpCo. The valuation date was as of December 31, 2007. The standard of value was fair market value.

ABC OpCo was based in New York City. The possibility of relocating the company was limited since the talent pool of specially trained employees was concentrated in New York City. ABC OpCo had a long history of profitable and successful operations there.

Because of the nature of the business and the need to be licensed to operate by a New York State regulatory body, those regulatory bodies had the ability to restrict the transfer and/or sale of a controlling equity interest in ABC OpCo to ensure the financial viability of the potential buyer. Further, were the owner, current or future, of ABC OpCo to decide to exit the business through liquidation, the regulatory body had the ability to require continued operation of ABC OpCo for a defined time period.

RE HoldCo also was based in New York City and was ...