Question #2

Reading: Reading 24 Private Company Valuation

PDF File: Reading 24 Private Company Valuation.pdf

Page: 3

Status: Correct

Correct Answer: A

Part of Context Group: Q2-6 First in Group
Shared Context
- Assuming Choo uses price multiples based on the four years of financial information from Bakan, ignoring his additional notes regarding 2x10, which of the following statements is least accurate? A) Price to Earnings ratios would be meaningless. B) Price to Book ratios would be the most useful as they would take account of the human capital in a start-up business such as Bakan. C) Price to Cash Flow ratios are theoretically better if calculated using free cash flow to equity rather than CFO.
Question
When valuing private companies, how would the factors described by Choo usually be classified?
Answer Choices:
A. Factor 1 Stock-specific, Factor 2 Stock-specific
B. Factor 1 Stock-specific, Factor 2 Company-specific
C. Factor 1 Company-specific, Factor 2 Company-specific
Explanation
Stock-specific factors are liquidity, restrictions on marketability, concentration of control. Company-specific are stage of lifecycle, size, quality and depth of management, management shareholder overlap, short-term investors, quality of information, taxes.
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