Aswath Damodaran 353
Analyzing a Private Firm
! The approach remains the same with important caveats
- It is far more difficult estimating firm value, since the equity and the debt of
private firms do not trade
- Most private firms are not rated.
- If the cost of equity is based upon the market beta, it is possible that we might be
overstating the optimal debt ratio, since private firm owners often consider all risk.
Private firms will tend to be more cautious about moving to a higher debt ratio
than otherwise similar publicly traded firms, because the owners of a private
business will not view default risk as diversifiable.
