University:
CFA Institute
Course:
CFA Level 2 - Equity
Academic year:

2023
Views:

11

Pages:

2
Author:

anon

CFA Level 2 - Equity Session 12-Reading 46 Private Company Valuation-LOS g (Practice Questions, Sample Questions) 1. Which of the following best describes the use of size premiums when estimating the discount rate for private company valuations? A) When using data from comparable public firms, a distress premium may be inadvertently added in. (Explanation: For private company valuations, a size premium is often added in when calculating the discount rate. This is not typically done for public firms. To get the size premium, the appraiser may use data from the smallest cap segment of public equity. This however may include a distress premium that is not applicable to the private firm) B) The treatment is similar to that for public firms. C) A size premium is subtracted when calculating the discount rate 2. Which of the following best describes how debt is incorporated into the estimation of the discount rate for private company valuations, relative to that for public firms? In general, the cost of debt: A) and debt capacity is the same for both private and public firms. B) is higher for private firms and debt capacity is the same for both private and public firms. C) is higher for private firms and debt capacity is lower for private firms. (Explanation: A private firm may not be able to obtain as much debt financing as a public firm. The small size of private firms may result in higher operating risk and a higher cost of debt) 3. Which of the following best describes projection risk in the estimation of the discount rate for private company valuations? A) If the availability of information from private firms is poor, the uncertainty of projected cash flows may increase. (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) B) Management will always be overly optimistic to increase the acquisition price. C) Projection risk results in higher discount rates