Discount rate for private company with 100% equity

vintagepotato's picture
Rank: Chimp | 15

What sort of discount rate do I use for evaluation of a capital budgeting project assuming company is 100% equity with no debt and is private limited? I dont think using industry average beta, unlevering it and then using beta to find Re from CAPM is good because CAPM usually works well for public companies so doing this method does not give accurate Re for the private company.

How would you guys go about doing it?

Comments (4)

May 3, 2017

What is the size of the company? If it is a large private company, and you can find suitable comparables on the public market, then you can use CAPM and unlevered Beta, if not, Ibbotson gives you the Wacc for each industry. So you can use that and adjust it for company specific risks.

May 3, 2017

company is a small company with annual revenues of about USD3 million. How do I find what is the company specific risk and what constitutes it?

May 3, 2017

Company specific risks are risks that only apply to the company itself and not to the overall industry. Ie. Is the management experienced, do they have a good supplier, what are their marketing efforts like, etc.. There is no specific way to quantify company specific risk, its mostly a judgement call.

May 4, 2017
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