No. of members in a private company = max 100.

Illiquidity discount and key person discount don’t come into picture during IPO or when a public firm
is buying a private firm.

For most private firms, it is considered that reinvestment rate is zero.

Key person discount = (Value of status quo – value when key person is lost)/Value of status quo

Illiquidity discount = 25-30% is the norm in India

Illiquidity discount = base rate of discounting (subjective) + difference

discount = 100-e^y

y = 4.33+0.036*ln (Revenue)-0.142*ln (RBRT)+0.174*(DERN)+0.332*(DCUST)

RBRT – restricted block of shares related to total common stock (value in %, e.g.- 100% = 100)

DERN – if operating profit>0, DERN = 1 else 0

DCUST – if the firm has relationship with customers, DCUST =1, else 0

Revenue in million dollars

difference = discount for actual revenue – discount when revenue is 10 million dollars

Distressed firms
Distress can be checked using ICR (if it is less than one, there is distress) and Altman Z-score

Altman Z-score = 1.28A+1.4B+3.3C+0.6D+1E

A = Working Capital/Total Assets
B = Retained earnings/Total Assets
C = EBIT/Total Assets
D = Market value of equity / Total Liabilities

E = Sales/Total Assets

If the distress is temporary: use normalisation

1)Adjusted present value Method:

Value the firm as if it is unlevered, i.e., it has no debt
APV = Value of unlevered firm + Benefits of debt – Cost of debt
Benefits of debt = Interest tax shield =Book value of debt*Tax rate
Cost of debt = Probability of default * bankruptcy cost
Bankruptcy cost = 25% to 30% of the book value of the firm, as per Altman
Probability of default – as per credit rating
2)
Value of equity = Value of equity in going concern*(1-probability of default) +value of equity
in default*(probability of default)
Value of equity in default = liquidation value – outstanding debt
Liquidation value = Book value of asset * distress proceed in %* (1-Liquidation Cost)
Distress proceed = 75% to 80%
Liquidation cost = 5% is commonly used

Contingent Claim Valuation/ Real Option Valuation:

1) Option to delay
2) Option to expand – call option
3) Option to abandon – put option
Option to delay:
Dividend yield = 1/Time to delay
Standard Dev = (SD calculated using monte carlo simulation)/Mean calculated using monte
carlo