Privat Company Valuation (help me be lazy)

CFA Level II
#1

I read last year’s schweser and I’m so burnt out I just can’t read anymore, I only have motivation to do questions and even thats a stretch. Can anybody give me the relevant points here, or if it really is worth the read, tell me to stop being a bitch and read it. I would just skip it but not taking the chance considering a.) its new, and b.) its in the most heavily weighted section.

#2

Here are some of the stuff that hit me recently , even tho I read it two times previously , I never remembered until now: CAPM – usual CAPM using beta and market Risk Premium Extended CAPM - usual CAPM plus risk premium for size. Build up - assume beta is 1.0 and do Extended CAPM plus industry risk premium.

#3
  1. Private companies have less liquidity and marketability than public companies 2. Three different valuations a) Transactional related - basically to sell the company b) Compliance related - legal or regulatory reasons c) Litigations related 3. Valuation approaches a) Income approach b) Market Approach c) Asset based approach 4. Normalize Earnings: Should exclude non recurring and unusual items, there may be discretionary or tax motivated expenses, excessive compensation, payment of personal expenses. Adjust for company owned real estate, removing the revenues and expenses and putting in rental costs. Then add realestate as owned real estate is all non operating asset of the firm 5. Could be a strategic(synergy) or financial buyer 6. Discount Rate Estimation premium for Size, availability and cost of debt (WACC typicall high), acquirere vs target (incorrectly use their own cost of capital), projection risk(less experienced managers), life cycle risk 7. CAPM is not appropriatee 8. Expanded CAPM - Additional premiums for size and firm specific 9. Build Up - When Beta is not possible, use build up. Beginning with market return, add premiums for size, industry factors, and company specific factors 10. Market Approaches to Valuation - Guideline public, guideline transactions(values from sale of controlling position info), prior transaction method (uses sales prices from actual transactions in the subject’s company shares) 11. Control and Marketability - A controlling position is more valuable. For minority positions use discount factor 12. DLOC - 1 - 1/1+control premium 13. Total discount = 1-((1-dloc)(1-dlom))
#4

Nice post drk!

#5

Appreciate the help there drk, would you say I should read it anyhow or if i know that list is that kind of the relevant points (IE you could read all of pensions but there are only a few important factors… )

#6

So far in my practice tests, I have only seen few questions - 1. normalizing expenses and 2. build up method. Don’t forget to start with the market return. I think I also saw one question on guildeline transaction vs. guideline public and discount of marketability and premium.

#7

Thx, appreciate it.

#8

I have only seen a few questions on this reading so far on my practice tests as well, but I wouldn’t put it past CFAI to have an entire vignette on the exam. However, if you have the stuff in DRK’s post down, I would think you sould be good to answer any Q regarding this reading on the exam.