Question

18. Discuss alternative ways of measuring value of privately held corporations.

Answer 1

Private companies are the companies that are not listed on the exchange and whose shares are privately held by shareholders of corporation.

Valuation methods- Are as following:

(1): Comparable company analysis- This method is used to compare the companies of the same industry with the help of EBITDA multiple. Private companies' information is generally not available in the public so we calculate each company's Earning before interest tax, depreciation and amortization and calculate the industry average then compare the EBITDA multiple with industry average to know the value of company.

Value of target firm = Enterprise Multiple * EBITDA

(2): Discounted cash flow method- This method is used to value the firm, in this method, estimated discounted cash flows are calculated. Future cash inflows are discounted with the help of discounting factor or required rate of return. Present value of expected future cash flow is known.

DCF = Estimtaed cash flow / WACC or required rate of return