Equity Asset Valuation, Second Edition

CHAPTER 7 ¹⁸⁰

PRIVATE COMPANY VALUATION

LEARNING OUTCOMES

 

After completing this chapter, you will be able to do the following:

• Compare and contrast public and private company valuation.

• Identify and explain the reasons for valuing the total capital and/or equity capital of private businesses.

• Explain the role of definitions (standards) of value, explain the different definitions of value, and illustrate how different definitions can lead to different estimates of value.

• Discuss the three major approaches to private company valuation.

• Illustrate and explain the adjustments required to estimate the normalized earnings and/or cash flow for a private company, from the perspective of either a strategic or nonstrategic (financial) buyer and explain cash flow estimation issues.

• Explain and illustrate methods under the income approach to private company valuation including the free cash flow method, capitalized cash flow method, and excess earnings method.

• Identify and explain specific elements of discount rate estimation that are relevant in valuing the total capital or equity capital of a private business.

• Compare and contrast models used in a private company equity required rate of return estimation (including the CAPM, the expanded CAPM, and the build-up method) and discuss the issues related to using each.

• Discuss and illustrate market approaches to private company valuation, including the guideline public company method, the guideline transactions method, and the prior ...