11 April 2012
I have proposed 2 strategic growth options for my company. These options are now evaluated using the Discounted cash flow [DCF] method to determine the value I can get for the investment i have put in at the end of 5 years [the term I have considered for the project].
The discounted cash flow needs to use the " weighted average cost of capital"[WACC] to determine the discount factor that will be used to determine the present value of the investment.
Now, WACC is usually possible to evaluated only if the company is stock listed. Our company being a private, non listed company, we do not have any values for Risk free rate, beta, or equity risk premium which are requried in WACC determination.
IN the meanwhile, if the WACC cannot be used, is there any process of determining the discount factor for the DCF method to be applied. I can assume a factor but then I will need to give my reasoning for the same.
11 April 2012
I have managed to calculate the cost of equity - ie. combination of risk free rate [ taken from government bond averages], beta [taken form a similar stock listed co] and equity risk premium [ from another listed data site].
Cost of debt: We can calculate
However, there is a 3rd factor in the WACC - i.e determining the market value of equity and market value of debt.
I am unsure how these can be determined for our company [ private firm] . Ca you help on the last part please?
11 April 2012
U can obtain the comparative data of similar companies and compute the PE multiple and multiply the same with PAT to get value of company and deduct value of debt to arrive at value of equity. Or see the ration of networth of similar kind company to its market value and u can apply the same ratio to ur company to compute value of ur company.
11 April 2012
sir if i take cost of equity as discounting factor then may be it will mean that i m ignoring the debt part of the company as funds are comprises of both equity and debts
and on the other part m nt able to find similar company as it is non organised sector to determine market value of equity and debt
12 April 2012
sir if i take cost of equity as discounting factor then may be it will mean that i m ignoring the debt part of the company as funds are comprises of both equity and debts
and on the other part m nt able to find similar company as it is non organised sector to determine market value of equity and debt
you may consider your most nearset company listed on BSE and consider their beta. Risk free rate will be common. You may take Govt Bond yiled for euivalent term.
All the factors can be picked from your exuisting balance sheet.
CAclubindia
