Private Company Equity Beta

Private Company Equity Beta

        Private Company equity beta may be found from the equity beta of a public company,               however, there are number of assumption is used for such calculation.

1.    Book Value of Public Co

It is assumed that book value and market value of public company is same, and asset beta is calculated on the bases of book value of public company.

2.    Business Risk Same

Second assumption of calculating equity beta is that business risk for both companies are same.

Private Company Equity Beta Calculation Process

1.                             Book Value of Public Company

In first stage book value of public company is calculated, because private company does not have market value, therefore book value of public company is required rather than market value.

2.                             Asset Beta for Public Company

Asset Beta for public Company is calculated on the bases of book value information of public company. This beta is calculated to find the similar business risk of both companies i.e. public & private company.

3.                             Equity beta for private Company

        Equity beta for private company is calculated using asset beta of public company and               gearing level of private company. Asset beta of public company is used, because it is                assumed that both companies have similar business risks.

4.    Cost  of Equity

Cost of equity may be calculated by using equity beta as calculated above. cost of equity is calculated with the help of CAPM formula

Private Company Cost of Equity Example

Mr. A want to acquire the a private company with following

Net asset = 300 Million

Debt= 200 Million

Listed Company information is within same industry & similar business risk has following information

Market Value Equity = 600 Million

Equity Beta for Company = 1.7

Price of Equity = 1.5 times of book value

Debt to Equity = 1.25

Tax Rate = 30%

Risk Free Interest = 5%

Market Rate = 8%

Solution

1.    Book Value of Equity & Debt

Market Value of Equity = 600 million

Market Value = 1.5 times of book Value

Book Value = Market Value/1.5

=600/1.5

=400 million (book Value of Equity)

= 500 Million (Book Value of Debt i.e. 1.25 x 400 million)

2.    Asset Beta

βa = [Ve/Ve + Vd (1-t)] x βe

= [400/400 + 500 (1-30%)] x 1.7

= [400/400+350] x1.7

= [400/750] x1.7

=.5333x1.7

=.9066

3.    Equity Beta for Private Co

βe = [Ve + Vd (1-t)/Ve] x βa

= [300+200(1-30%)/300] x.9066

= [440/300] x.9066

=1.4667x.9066

=1.329

4.    Cost of Equity

Cost of Equity = Rf + βe (Rm – Rf)

= 5% +1.329 (8% - 5%)

= 5% + 1.329 (3%)

= 5% + 3.9%

=8.9%