Principles of Private Firm Valuation

The business-as-usual value, or going-concern value,is a product of the
firm’s sales and capital needs growing at recent historical rates. These activ-
ities are financed at the firm’s optimal capital structure and reflect the fact
that management does not expect the future to deviate in any important
way from the past. Say management plans to increase capital expenditures

Creating and Measuring the Value of Private Firms 13

Minimum cost of financing

0.5 1 2

Debt/equity

Cost of capital (%)

FIGURE 2.2 Value Curve

(a)

Maximum value of firm

0.5 1 2

Debt/equity

Value ($)

(b)