Pvt co. Valuation querry

CFA Level II Equities
#1

Hi,

This is regarding evaluating the optimal capital structure for valuing a pvt co. by a public co. (Pls refer to Blue box question in the Pvt Co. Valuation Chapter - Solution 4 on Pg 441 of Main Book 4).

My question is - if the pvt co. is being acquired by a ‘public’ company, it should have as much access to the debt captial as the public company (since the pvt company will be absorbed by the latter). In such a case why should we still not treat the average optimal capital structure of public companies in the same industry as the one to be used to calculate WACC?

Agreed - if the pvt company is being valued on a ‘standalone basis’, a capital structure lower than the average optimal capital structure of public companies in the same industry should be considered.

#2

Think about this from the point of view of the acquiring company. They want to pay the lowest valuation possible for an acquisition, and accordingly will use the highest WACC possible as the discount rate in valuing the private co. Looking at this another way, every potential acquirer will have a different WACC, resulting in a different valuation, so in order to value the private co in isolation, its own WACC (private co) should be used, so a single valuation can be generated.