Damodaran on Valuation_ Security Analysis for Investment and Corporate Finance ( PDFDrive )

(Hop HipldF0AV) #1

assetsareliquidandcanbesoldwithnosignificantlossin
value.Aprivatefirmwithsignificantholdings ofcashand
marketablesecuritiesshouldhavealowerilliquiditydiscount
thanone with factoriesor otherassetsfor whichthere are
relatively few buyers.


2.Financialhealthandcashflowsofthefirm.Aprivatefirm
thatisfinanciallyhealthyshouldbeeasiertosellthanonethat
isnothealthy.Inparticular,afirmwithstrongearningsand
positivecashflowsshouldbesubjecttoasmallerilliquidity
discount than one with losses and negative cash flows.


3.Possibilityofgoingpublicinthefuture.Thegreaterthe
likelihoodthataprivatefirmcangopublicinthefuture,the
lowershouldbetheilliquiditydiscountattachedtoitsvalue.
In effect, theprobability of going public is built into the
valuationof theprivate firm.To illustrate,theowner ofa
privatee-commercefirmin 1998 or 1999 wouldnothavehad
toapplymuchofanilliquiditydiscountifany,tohisfirm’s
value,becauseof theeasewith whichthefirmcouldhave
been taken public in those years.


4.Sizeofthefirm.Ifwestatetheilliquidity discountasa
percentofthevalueofthefirm,itshouldbecomesmalleras
thesizeofthefirmincreases.Inotherwords,theilliquidity
discount shouldbe smaller as a percent of firm value for
private firms like Cargill and Koch Industries, which are
worthbillionsofdollars,thanitshouldbeforasmallfirm
worth $5 million.


5.Controlcomponent.Investinginaprivatefirmisdecidedly
more attractivewhen you acquire a controlling stakewith
yourinvestment.Areasonableargumentcanbemadethata

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