Question #20
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 11
Status: Incorrect
Correct Answer: B
Your Answer: B
Question
Which of the following best describes the use of size premiums when estimating the discount rate for private company valuations?
Answer Choices:
A. The treatment is similar to that for public firms
B. A size premium is subtracted when calculating the discount rate
C. When using data from comparable public firms, a distress premium may be inadvertently added in
Explanation
For private company valuations, a size premium is often added in when calculating the
discount rate. This is not typically done for public firms. To get the size premium, the
appraiser may use data from the smallest cap segment of public equity. This however may
include a distress premium that is not applicable to the private firm.