Page 52 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.i: Calculate the value of a private company
based on market approach methods and describe READING 33: PRIVATE COMPANYVALUATION
advantages and disadvantages of each method – 3
types! MODULE 33.3: MARKET-BASED VALUATION

EXAMPLE: An analyst, Natalie Hoskins, is valuing a private firm, RAC, using the GPCM and MVIC to EBITDA multiples. Hoskins has
gathered data for comparable public firms; however they are larger in size than Rensselaer. Hoskins decided to deflate the average public
company multiple by 20% to account for the higher risk of Rensselaer. A premium of 30% was paid for a firm by an acquiring firm in the
same industry. The acquirer exchanged stock for the target.

1. Comment on the relevance of the
information above for the valuation of RAC.
2. Calculate the equity value of RAC using the
GPCM.

Answer 1:
The application of control premiums is difficult and requires subjective judgment.
• 30% is probably not relevant for the valuation of RAC;
• The prior acquisition premium likely contained some value for synergies since it was a strategic transaction;
• Because stock was used, there is also the possibility that the stock value at the time was inflated, adding to the estimated premium.
• The adjustment to the public company multiple of 20% is appropriate because growth and risk may differ between public comparables and
private firms.

Answer 2:
The adjustment to the MVIC/EBITDA multiple for the higher risk of Rensselaer is:8.0 × (1 – 0.20) = 6.4
• No control premium is applied, for the reasons mentioned above.
• The adjusted multiple is applied against the normalized EBITDA: 6.4 × $12,800,000 = $81,920,000
• Subtracting out the debt results in the equity value: $81,920,000 – $1,100,000 = $80,820,000