How do you Value Non-Traded Firms?

The value of an asset is the present value of its expected returns. The most frequently used valuation method for traded firms is the Discounted Cash Flow Analysis. The required rate of return used to discount the cash flows for traded firms is calculated by the CAPM. One of the variables in the CAPM is beta, which is a measure of risk. Normally the beta is calculated by comparing the volatility of a stock compared to an index over a period of time, however this requires that the company is traded on the stock market.

Purpose: The purpose of this thesis is to examine which methods there are to value non traded firms, and also determine which method that gives the most reasonable value and is the least affected by the appraiser’s own judgment.


1. Introduction
1.1 The Importance of Unlisted Firms
1.2 The Importance of knowing a Firm’s Market Value
1.3 Problem Area & Refinement
1.4 Purpose Statement
1.5 Research Questions
1.6 Limitations
1.7 Presentation of the company
1.8 Disposition
2. Scientific Methodology
2.1 Scientific Approach
2.1.1 My Views towards Fair Market Value
2.1.2 My Views towards Valuation
2.2 Applied Work Method
2.2.1 Collection of Data
2.2.2 The Selection of firms
2.2.3 The Selection of a non-traded firm
2.2.4 Critical Evaluation of the Research
3. The Capital Asset Pricing Model
4. The problem of applying the Discounted Cash Flow Analysis on Non-Traded Firms
4.1 Company XYZ
5. Asset Based Valuation
5.1 Different Asset Based Valuation Methods
5.2 The Capitalized Excess Earnings Method
6. Multiple Based Valuation
6.1 Multiples
6.2 The Multiple of Discretionary Earnings Method
7. The Discounted Cash Flow Analysis
7.1 Expected Cash Flow
7.2 Estimating the Required Rate of Return
7.3 Adjustments to the Required Rate of Return
7.3.1 Lack of Diversification
7.3.2 Illiquidity Discounts
7.3.3 Small Firm Effect
7.4 Valuation
7.5 The Minority Discount and the Control Premium
8. Interviews with Professionals
8.1 Accounting Firm A
8.1.1 Discounted Cash Flow
8.1.2 Multiple Based Valuation
8.2 Accounting Firm B
8.2.1 Discounted Cash Flow
8.2.2 Multiple Based Valuation
8.3 Accounting Firm C
8.3.1 Discounted Cash Flow
8.4 Private Equity Firm A
8.4.1 Multiple Based Valuation
8.5 Private Equity Firm B
8.5.1 Discounted Cash Flow
8.5.2 Multiple Based Valuation
9. Comparison between Academics and Professionals
10. Valuation of Tidaholmsbilar AB
10.1 The Capitalized Excess Earnings Method
10.1.1 Analysis of the Capitalized Excess Earnings Method
10.2 The Multiple of Discretionary Earnings Method
10.2.1 Analysis the Multiple of Discretionary Earnings Method
10.3 Multiples
10.3.1 Analysis of Mutiples
10.4 The Discounted Cash Flow Analysis
10.4.1 Tidaholmsbilars AB’s Required Rate of Return
10.4.2 Adjustments made to The Required Rate of Return
10.4.3 Valuation of Tidaholmsbilar AB
10.4.4 Analysis of the Discounted Cash Flow Analysis
10.5 Lack of control
11. Conclusions
12. Recommendations
12.1 How to apply the Discounted Cash Flow Analysis on non-traded firms
Appendix A
Appendix B
Appendix C

Author: Karlsson, Kristoffer

Source: Linköping University

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