Private Company Valuation Examle

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• Levered beta = 2.36 (1 + (1-.4) (.1433)) = 2.56 • Cost of equity =4.25 + 2.56 (4 ) = 14.50 (T Bond rate was 4.25 at the time 4 is the equity risk premium) Aswath Damodaran 172 Estimating a cost of debt and capital  While the firm does not have a rating or any recent bank loans to use as reference, it does have a reported operating income and lease expenses (treated as interest expenses) • Coverage Ratio = Operating Income/ Interest (Lease) Expense = 400,000/ 120,000 = 3.33 • Rating based on coverage ratio = BB+ Default spread = 3.25 • After-tax Cost of debt = (Riskfree rate + Default spread) (1 – tax rate) = (4.25 + 3.25 ) (1 - .40) = 4.50  To compute the cost of capital, we will use the same industry average debt ratio that we used to lever the betas.. Silber related the size of the discount to characteristics of the offering: LN(RPRS) = 4.33 +0.036 LN(REV) - 0.142 LN(RBRT) + 0.174 DERN + 0.332 DCUST RPRS = Relative price of restricted stock (to publicly traded stock) REV = Revenues of the private firm (in millions of dollars) RBRT = Restricted Block relative to Total Common Stock in DERN = 1 if earnings are positive 0 if earnings are negative DCUST = 1 if there is a customer relationship with the investor 0 otherwise Aswath Damodaran 180 Cross sectional differences in Illiquidity: Extending the Silber regression Figure 24.1: Illiquidity Discounts: Base Discount of 25 for profitable firm with 10 million in revenues 40.00 35.00 Discount as of Value 30.00 25.00 20.00 15.00 10.00 5.00 0.00 5 10 15 20 25 30 35 40 45 50 100 200 300 400 500 1000 Revenues Profitable firm Aswath Damodaran Unprofitable firm 181 The IPO discount: Pricing on pre-IPO transactions (in 5 months prior to IPO) Aswath Damodaran 182 The “sampling” problem  With both restricted stock and the IPO studies, there is a significant sampling bias problem.. Aswath Damodaran 190 InfoSoft: A Valuation Current Cashflow to Firm Reinvestment Rate EBIT(1-t) : 2,933 106.82 - Nt CpX 2,633 - Chg WC 500 =