Question #35
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 18
Status: Unattempted
Correct Answer: B
Question
Which of the following best describes projection risk in the estimation of the discount rate for private company valuations?
Answer Choices:
A. Projection risk results in higher discount rates
B. Management will always be overly optimistic to increase the acquisition price
Explanation
Projection risk refers to the risk of misestimating future cash flows. Given the lower
availability of information from private firms, the uncertainty of projected cash flows may
increase.
However, management may not be experienced with projections and may underestimate
or overestimate future prospects. The discount rate would then be decreased or increased
accordingly. So management is not always overly optimistic and projection risk does not
always result in higher discount rates.