wacc or internal required rate for private company
I was just wondering how do you calculate wacc or any other discount rates for a private company with NO DEBT at all? The company has been in business for over 10++ years and somehow they have managed to do well with zero debts, how do you calculate wacc or return on equity to be used for the evaluation of capital budgeting projects?
If it's for the evaluation of capital budgetint projects, the overall, current, company's net debt does not matter. What matters is how you're gonna finance those projects.
Capital structure: assume target capital structure for that particular project (if it's zero debt, it's fine) Cost of equity: traditional CAPM, and then apply premiums based on specific risk attributes (size of the project, etc.) Cost of debt (if any): expected before tax cost of debt
If the cash-flows you're gonna discount are not in a strong currency, then apply an inflation differential to the previously calculated discount rate.
Valuing private companies: http://people.stern.nyu.edu/adamodar/pdfiles/papers/pvtfirmval.pdf
I tend to think about the capital structure as ideal leverage for long term optimization. For example, if companies in the comp set should be ideally levered to 2.5x, then you can use that to determine debt sizing - even for companies that currently do not have that leverage ratio.
So a few things you will need to clear up to get a good answer: 1. Are you looking to calculate an IRR or WACC? Sounds like a WACC but just want to clarify. 2. What are you trying to value? Your own company or another private company?
Sorry if you answered these questions, just skimmed through real quick.
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