I am trying to value preferred shares of a private company. I managed to model my future cash flow stream for preferred shareholders but i’am not sure how to calculate a proper disount rate for such CFs. Does anybody know how to calculated preferred shares discount rate when there is an abscence of market valye?
I don’t know for sure, but I was under the impression that you try to use publicly traded comparables and then perhaps a premium for illiquidity. You can also take the long end of the yield curve (as far out as you can get) and take that interest rate, then apply a some spread to reflect credit risk and the possibility of missed payments that don’t quite count as defaults.
Just some thoughts, but clearly some number is going to end up being be a subjective judgement you pull out of the air. Just for fun, I’d reccomend multiplying some number by (1 + 1/pi) to emphasize the fact that whatever subjective choice you make is not guaranteed to be rational
Thanks. That’s what i though. ) But i don’t see any relevant publicly traded comparables which i can use in my case. I just hoped that there is any way to do this which might be recognized within finance community and won’t raise a lot of qustions and skepticism. 
You can take the long bond and add a credit premium. You’d want an extra big premium because 1) preferreds aren’t required to pay they way ordinary bonds are, 2) the long bond is only 10 years (or 30 if you are in a currency that has 30y bonds), so you will want additional premium for maturity extension beyond 10 or 30 years (which you could try to get by extrapolating the yield curve out to something like 50 or 100 years and see if it gives you a number that doesn’t seem crazy) and 3) the preferred is presumably illiquid.
If the preferreds are not convertible, then they are not much different than an unsecured bond. There is a tremendous amount of recent data on high yield offerings because of the ample liqudity in the credit markets - look these up and by matching the leverage and coverage ratios from the offerings (total debt post offering / EBITDA, EBITDA / Interest expense, etc.) with your company’s metrics, you can select the relevant offering yields as your discount rate. Be sure to treat the preferred stock principal as unsecured debt when you calculate the ratios for your own company. I wouldn’t be too worried about the term structure (i.e. bonds from your high yield offerings mature in 5-10 years whereas the preferred has presumably longer holding period) - most of these unsecured subordinate bonds will not be repaid in the stated timeframe and investors expect that they will be refinanced, so the horizon is probably much longer than the stated maturity anyway.
If the preferred is convertible, then it is similar to convertible debt for which there is a lot of research on valuation methods. Simplest way is to decompose it into a bond, which you can price using the discount rate as above, and an equity upside which you can price as a call option. Of course if the conversion feature is deep in the money then the preferred is not much different than just ordinary common equity, which you can discount using simply CAPM.