When valuing a private company, which approach is commonly used to estimate its WACC?

When valuing a private company, which approach is commonly used to estimate its WACC?

• A. Use the private company's own beta from its stock price
• B. Use WACC of publicly traded comparables adjusted for size and risk
• C. Use the Cost of Debt only
• D. Use the company's dividend yield

Answer: (B)

When valuing a private company, you estimate WACC using the WACC of publicly traded comparables adjusted for size and risk. Since a private firm has no observable stock price or beta, you don’t have a market-based cost of equity for it. Instead, you take the cost of capital from similar publicly traded companies and tailor it to reflect how the private firm differs in size and risk. This involves using the public peers’ beta as a starting point (via CAPM) and then adjusting for the private company’s smaller size, liquidity, and higher risk premium, as well as aligning debt costs and tax effects to the private firm's financing profile. This approach provides a market-based, comparable proxy for the private firm’s overall cost of capital, which is far more realistic than trying to rely on debt cost alone or on dividend measures.

When valuing a private company, you estimate WACC using the WACC of publicly traded comparables adjusted for size and risk. Since a private firm has no observable stock price or beta, you don’t have a market-based cost of equity for it. Instead, you take the cost of capital from similar publicly traded companies and tailor it to reflect how the private firm differs in size and risk. This involves using the public peers’ beta as a starting point (via CAPM) and then adjusting for the private company’s smaller size, liquidity, and higher risk premium, as well as aligning debt costs and tax effects to the private firm's financing profile. This approach provides a market-based, comparable proxy for the private firm’s overall cost of capital, which is far more realistic than trying to rely on debt cost alone or on dividend measures.