The Implied Private Company Pricing Line: Empirically Observing the Cost of Capital COC  =  FCFF/P + G

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American Society of Appraisers Business Valuation Review™
Spring 2012 Volume 31, Issue 1 pp. 35-47
Peter J. Butler, CFA, ASA
Robert M. Dohmeyer, ASA

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Summary

In this paper, we show that small privately held businesses are not priced according to the Capital Asset Pricing Model (CAPM) or Modern Portfolio Theory (MPT); outline the many highly problematic comparisons between publicly traded equity securities and small privately held businesses; and develop an Implied Private Company Pricing Line (IPCPL) based on market approach transactions in small privately held businesses as our means to eliminate these highly problematic comparisons and to use as an accurate starting point to develop a cost of capital for any privately held company.
The Implied Private Company Pricing Line: Empirically Observing the Cost of Capital COC  =  FCFF/P + G
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