Question #34
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 18
Status: Incorrect
Correct Answer: A
Your Answer: C
Question
Which of the following statements related to the models used to estimate the required rate of return to private company equity is most accurate:
Answer Choices:
A. The CAPM model uses betas estimated from firm returns of other private firms
B. The expanded CAPM model adds premiums for size and firm-specific risk
C. The build-up method begins with betas for comparable public firms and adds risk premiums
Explanation
Expanded CAPM adds premiums for size and firm-specific risk. CAPM may not be
appropriate for private firms because beta is usually estimated from public firm returns.
The build-up method adds an industry risk and other risk premiums to market rate of
return; it is used when betas for comparable public firms are not available.