Privately Held Company Valuation and Cost of Capital

Rojo-Ramírez Alfonso A. ()
Additional contact information
Rojo-Ramírez Alfonso A.: Department of Economics and Business, University of Almería, La Cañada de San Urbano s/n, Almería 04120, Spain

Journal of Business Valuation and Economic Loss Analysis, 2014, vol. 9, issue 1, 1-21

Abstract: The aim of this paper is to contribute to a deeper knowledge of the discount rate in the framework of privately held company (PHC) valuation. Their main purpose is to test if the expected rate of return on equity differs between PHCs and quoted companies and if their accounting rate of return is greater than the cost of equity capital. This paper contributes in two different ways: first, distinguishing between the so-called purely financial investor and the economic risk investor to construct a model that permits to calculate the PHC’s cost of equity capital; second, assuming rational economic behavior. It is argued that in the valuation of non-quoted companies, investors need to be able to choose a model that goes beyond the beta of the capital asset pricing model (CAPM), proposing the three-component model based on Rojo-Ramírez, Cruz-Rambaud and Alonso Cañadas (2011). The empirical analysis leads us to conclude that the use of this model improves the overestimated value of a company by applying the discount rate of the CAPM (between 28% and 49%), which is consistent with professional practice.

Keywords: firm valuation; discount rate; equity premium; privately held companies; economic risk investor (search for similar items in EconPapers)
Date: 2014
References: View references in EconPapers View complete reference list from CitEc
Citations:

Downloads: (external link)
https://doi.org/10.1515/jbvela-2013-0017 (text/html)
For access to full text, subscription to the journal or payment for the individual article is required.

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:bpj:jbvela:v:9:y:2014:i:1:p:21:n:3

Ordering information: This journal article can be ordered from
https://www.degruyter.com/journal/key/jbvela/html

DOI: 10.1515/jbvela-2013-0017

Access Statistics for this article

Journal of Business Valuation and Economic Loss Analysis is currently edited by Bradley T. Ewing and James J. Hoffman

More articles in Journal of Business Valuation and Economic Loss Analysis from De Gruyter
Bibliographic data for series maintained by Peter Golla ().