Question #14
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 9
Status: Correct
Correct Answer: A
Question
Which of the following best describes the build-up method used for the estimation of the discount rate in private company valuations?
Answer Choices:
A. It is useful when there are no comparable public firms
B. An industry risk premium is not included because it is captured in the equity risk premium
C. Because it is not used in the calculation, beta is assumed to be zero
Explanation
If it is not possible to find comparable public firms with which to estimate beta by, the
build-up method can be used for a private firm. It is similar to the expanded CAPM except
that beta is not used. Implicitly, beta is assumed to be one. Both industry risk premiums
and equity risk premiums are used. The risk-free rate, the equity risk premium, the small
stock premium, a company-specific risk premium, and an industry risk premium are added
together in the build-up method.