Chapter 7 - Private Company ValuationExcess Earnings MethodExample for Slides 13-15

ASSUMPTIONSWorking capital $400,000 Fixed assets $1,600,000 Normalized earnings $225,000 Required return for working capital 5%Required return for fixed assets 12%Growth rate of residual income 3%Discount rate for intangible assets 18%

OUTPUT - Firm ValueWC required income $ 20,000 FA required income $ 192,000

Residual income $13,000

Value of intangibles $ 89,267

Firm value $ 2,089,267

Chapter 7 - Private Company ValuationDeveloping Discount Rates for Private Firms - 3 Required Rate of Return ModelsExample for Slides 17-19

ASSUMPTIONSRisk-free rate 1.00%Equity risk premium 6.00%Beta 1.5Small stock premium 4.00%Company-specific risk premium 1.50%Industry risk premium 1.20%

OUTPUTCAPM expected return 10.00%Expanded CAPM expected return 15.50% no industry RP hereBuild-Up expected return 13.70% no beta but industry RP here

Chapter 7 - Private Company ValuationValuing a Private Firm Using the Guideline Public Company MethodExample for Slides 24-27

ASSUMPTIONSMarket value of debt $6,800,000 $6,800,000 Normalized EBITDA $28,000,000 $28,000,000 Average MVIC/EBITDA multiple 9.0 9.0 Control premium from past transactions 20% 20%Discount for increased risk 18% 18%

Strategic? yes no

OUTPUTMultiple adjusted for risk 7.4 7.4 Multiple adjusted for control 8.9 7.4

Firm value $ 249,200,000 $ 207,200,000

Value of equity $ 242,400,000 $ 200,400,000

Change these inputs in Column B to arrive at outputs below. Indicate "yes" or "no" in Column B or C as to whether buyer is strategic, i.e., a control premium will increase the valuation in the case of a strategic buyer.

Chapter 7 - Private Company ValuationCalculating the Valuation Discount Using DLOCExample for Slide 30

ASSUMPTIONSControl premium 19%

OUTPUTDLOC 16.0%

Chapter 7 - Private Company ValuationCalculating the Total Valuation Discount Using the DLOC and the DLOMExample for Slide 32

ASSUMPTIONSDLOC 20%DLOM 16%

OutputTotal valuation discount 32.8%