Reading 46: Private Company Valuation-LOS a 习题精选 contrast, companies, valuation, 2011, class

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Session 12: Equity Investments: Valuation Models
Reading 46: Private Company Valuation

LOS a: Compare and contrast public and private company valuation.

 

 

An analyst is examining three companies. Given the information below, which of them is most likely to be a private firm?

Firm	Number of Years in Operation	Market Capitalization	Required Return for Common Stock
A	12 years	$1,324.8 million	14.8%
B	4 years	$1,313.9 million	18.3%
C	19 years	$2,231.0 million	16.4%

A) Firm B.

B) Firm A.

C) Firm C.

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The firm most likely to be a private firm is Firm B. Compared to public firms, private firms are less mature (4 years for Firm B), smaller (market cap of B is $1,313.9 million), and have higher required returns (required return for B is 18.3%).

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An analyst is examining the stock of three companies. Given the information below, which of them is most likely to be the stock of a private firm?

Firm	Restrictions on Sale of Stock?	DLOM	Stock Ownership of 5 Largest Owners
A	Yes	0%	28%
B	No	5%	35%
C	Yes	15%	64%

A) Firm B.

B) Firm A.

C) Firm C.

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The stock most likely to be that of a private firm is Firm C. Compared to public stock, private firm stock often has agreements that prevent shareholders from selling, is less liquid (discounts for lack of marketability (DLOM) of C is 15%), and control is usually concentrated in the hands of a few shareholders (stock ownership of largest owners of Firm C is 64%).

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Which of the following statements most accurately describes the difference between private and public firm managers?

A) Because managers in a public firm are often paid with incentive compensation, public managers may take a longer term view than private managers.

B) Although managers in a public firm are often paid with incentive compensation, public managers may take a shorter term view than private managers because shareholders often focus on the short-term.

C) Because managers in a private firm are concerned with having the firm go public, private managers may take a shorter term view than public managers.

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Although managers in a public firm are often paid with incentive compensation such as options, shareholders often focus on short-term measures such as quarterly earnings and the consistency of such. Management may therefore take a shorter term view than they otherwise would. Private firms should be able to take a longer term view.