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: Suggested Citation