Finding the Discount Rate for a Private Firm Using Public Comparables

Abstract

Determining the cost of equity is one of the most difficult problems in corporate finance. In this paper, we present a simple estimation example using an internet start-up company. We use public firm comparables for beta, making adjustments for leverage using Harris and Pringle’s (1985) assumptions, rather than Hamada’s (1972). While we consider adjustments for size, unsystematic risk, and illiquidity, we argue that significant adjustments to a Capital Asset Pricing Model approach using public comparables may be unnecessary.

Keywords: CAPM, Equity Valuation, Private Firm Valuation

JEL Classification: G10, G11