Question #13
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 9
Status: Correct
Correct Answer: B
Question
Which of the following best describes how debt is incorporated into the estimation of the discount rate for private company valuations, relative to that for public firms? In general, the cost of debt:
Answer Choices:
A. and debt capacity is the same for both private and public firms
B. is higher for private firms and debt capacity is lower for private firms
C. is higher for private firms and debt capacity is the same for both private and public firms
Explanation
A private firm may not be able to obtain as much debt financing as a public firm. The small
size of private firms may result in higher operating risk and a higher cost of debt.