Private Company Valuation

Question 1

Normalized Earnings

Answer 1

Earnings excluding non-recurring or unusual items.

Question 2

Capitalized Cash Flow Method (CCM)

Answer 2

value of firm = FCFF1 / ( WACC - g )

value of equity = FCFE1 / ( r - g )

Question 3

Excess Earnings Method (EEM)

Answer 3

Firm earnings minus earnings required on WC minus earnings required on FA

EEM = Earnings - required return * WC - required return * FA

Question 4

Valuation using EEM

Answer 4

(1) Calculate required return for WC and FA
(2) Calculate excess earnings
(3) Determine value of intangible assets
value intangibles = excess earnings * 1+g / ( r - g )
(4) Sum all sources of value:
(a) WC
(b) FA
(c) value of intangibles

Question 5

Guideline Public Company Method (GPCM)

Answer 5

Uses price multiples from trade data with ADJUSTMENTS to MULTIPLES to account for differences between subject firm and comparables

Question 6

Incorporating Control Premium

Answer 6

Two Methods

(1) Use raw multiple to estimate firm value, then subtract debt to get equity value, then apply control premium to equity value.
(2) Adjust the multiple and use it on the firm value.

adjusted multiple = raw multiple * [ 1 + [ control premium / ( 1 + D/E ) ] ]

Question 7

Discount for Lack of Control (DLOC)

Answer 7

DLOC = 1 - [ 1 / ( 1 + control premium ) ]

Question 8

Applying DLOC and DLOM together

Answer 8

Multiplicative, not additive.

total discount = 1 - [ (1-DLOC) * (1-DLOM) ]