An Independent Evaluation of the Reliability of the Implied Private Company Pricing Line Model in Appraisal Practice

Author's version. First published as: Dawson, Peter C. 2017. "An Independent Evaluation of the Reliability of the Implied Private Company Pricing Line Model in Appraisal Practice". Journal of Business Valuation and Economic Loss Analysis, Vol. 12, No. 1, pp. 63-99.

36 Pages Posted: 30 Sep 2015 Last revised: 7 Jun 2017

Date Written: July 7, 2016

Abstract

The Implied Private Company Pricing Line (IPCPL) model is intended to calculate a reliable present value discount rate for a 100% control interest in a private/closely-held operating company under the Fair Market Value Standard. But, would its application be more reliable than the Adjusted Capital Asset Pricing Model (ACAPM) or Build-Up Method (BUM)? This article evaluates two core aspects of the model’s practical application that have received little attention in the literature: (1) Does it eliminate a significant portion of subjective adjustments? The private company market’s adjustment for key marketability differences is said to be built into the private company transaction prices, eliminating the need for an appraiser to subjectively quantify and apply those adjustments; and (2) Being “actual market clearing prices”, do the private company transaction prices reflect Fair Market Value?

Keywords: implied private company pricing line, IPCPL, fair market value, FMVS, ACAPM, buildup method, opportunity cost, present value discount rate, cost of capital, required rate of return

JEL Classification: D01, D46, G11, G12, G32, M20

Suggested Citation

Dawson, Peter C., An Independent Evaluation of the Reliability of the Implied Private Company Pricing Line Model in Appraisal Practice (July 7, 2016). Author's version. First published as: Dawson, Peter C. 2017. "An Independent Evaluation of the Reliability of the Implied Private Company Pricing Line Model in Appraisal Practice". Journal of Business Valuation and Economic Loss Analysis, Vol. 12, No. 1, pp. 63-99., Available at SSRN: https://ssrn.com/abstract=2666677 or http://dx.doi.org/10.2139/ssrn.2666677

Peter C. Dawson (Contact Author)

Independent Scholar ( email )

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