Question on Discount Rates
Hello,
I'm currently working on an assignment that requires a DCF valuation for a private company and I'm trying to figure out the best course of action to take regarding calculating a discount rate.
We have been given information on the long term capital structure, long term beta, current equity risk premium, risk-free rate, and an estimated debt schedule spanning 4 years. We have also been given some info on four public comparables, mostly for the purpose of using their multiples.
Here is the situation
- The given long term beta (for the terminal period) is 1.00
- Terminal capital structure is a D/E of 0.25
- The average unlevered beta of the comparables is 0.73-0.75 (2-year historical beta).
- The average capital structure of the comps is a D/E of 0.15
- When I relevered it based on avg capital structure of the comparables I got a beta of 0.81
Would it make sense to use the levered beta based on the comparables for the short term and use the beta of 1.00 for the long term when I plug the figures into the CAPM?
Thanks.
bump
bump
Take the average unlevered beta - and relever it using the target terminal capital structure.
So 0.75 + (1- t) * 0.25 = 0.75 + 0.7 * 0.25 = ~0.92 is your relevered beta
The reason you use the target capital structure and not avg of comps, is that capital structure is company specific and, in this case, you have guidance on the long-term company capital structure.
The theory is that the average unlevered beta of comparables represents some average risk factor for this type of asset (regardless of capital structure, e.g., home builders are just straight up riskier than consumer staples) - and you then apply the riskiness of your capital structure to that.
Neque eos debitis dolores quo quis. In nisi vel vero et sit minima. Similique laudantium debitis aspernatur voluptatum aut. Quasi deserunt autem eligendi illum quod tempora voluptatibus porro.
Expedita enim esse rerum asperiores autem laboriosam asperiores. Non ipsa sint aut ipsam enim officiis rerum. Quidem ipsa et quas. Voluptates voluptatem quibusdam ullam quibusdam earum dolores pariatur. Nemo iure vitae voluptates non nemo eaque. Rerum eum molestiae iste assumenda eos eaque.
Veniam cumque nihil eos voluptas velit quis. Sunt fuga facilis repellendus maiores iusto quidem. Earum tempora tenetur aliquid nobis aut. Et accusantium expedita odit dolorem sit.
Dignissimos enim exercitationem dicta aliquam soluta. Exercitationem aut architecto hic placeat. Inventore voluptatum eum suscipit quibusdam.
See All Comments - 100% Free
WSO depends on everyone being able to pitch in when they know something. Unlock with your email and get bonus: 6 financial modeling lessons free ($199 value)
or Unlock with your social account...