Control Premium - How is it affected by Debt Ratio?

CFA Level II Equities
#1

I have an Elan Guides practice problem set (Private Equity, Problem #7) that is suggesting that when applying a Control Premium to an industry multipe (GPCM method) you, in addtion, should apply the relative weight of equity versus debt.

In other words…

Industry Multiple = 7.2

Control Premium = 20%

Debt Ratio = 60%

Elan Guides says the adusted multiple should be 7.2 X 1.20 X .625

This doesn’t appear in the curriculum that I can see… but it does kind of make sense I guess, especially for highly leveraged companies… But still I would think you would consider numerous factors in creating a Control Premium, not the clean separation of control versus cap structure they are suggesting.

Thoughts?

#2

Wait!!! I just found it – buried at the end of a Blue Box.

You do apply cap structure to Control Premia jus like they said…

Sorry! Carry on…

#3

Good find though. I found this the other day and hadn’t seen it in any problem anywhere. Sounds like something that is super likely to be on the exam.

#4

Never seen it… Which page is it?

IMO we should onyl adjust for contron premium as the capital structure is already reflected in price.

#5

How did you get the .625? And where can this be found?

#6

Well I don’t realy agree with that number, based on the debt ratio. It is supposed to be equity as a percentage of total assets. So if you have 2/3 equity, 1/3 debt, you would use 0.667. The 0.625 would be appropriate if debt/equity were given as 0.6. When I see a “debt ratio,” I think of it as debt/assets. Under this interpretation, you would have 40% equity, so the revised multiple would be 7.2 x 1.20 x 0.4.

If that is indeed debt/equity, then it’s right. 1/1.6 = 0.625 is equity