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Q: Value of Company Stock ( Answered,   1 Comment )
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 Subject: Value of Company Stock Category: Business and Money > Finance Asked by: crazyjake-ga List Price: \$10.00 Posted: 18 Nov 2004 07:19 PST Expires: 18 Dec 2004 07:19 PST Question ID: 430625
 ```How does one calculate the value of unlisted (privately held) stocks? In other words, if publicly held stocks are valued based on the market, how are unlisted stocks valued?```
 ```There are a number of ways to value privately held stocks, all of which are in some ways subjective. As such, there is no single way that everyone uses, and the value of privately held stocks, partnerships, and other such assets is frequently a source of conflict. Partners argue about the cost of a buyout. Divorce attorneys argue about the value of a spouse's ownership in a private business. Taxpayers argue about capital gains in the event of a sale. That said, I'm going to provide you with two ways to calculate the value, both of which assume you have some financial data on the company. If you have no financial data on the company, there is no reliable way to value the stake. There are two primary approaches to the valuation of assets for which the market does not set prices. Both have their flaws, but calculating the value of an investment using both methods, then comparing the values, may be your best option. Strategy #1: Discounted cash flow valuation. This is the more technical of the two methods, and considered by many financial analysts to be the gold standard of valuation. In order to calculate the discounted cash flow value, you need to determine the cost of equity and the firm's cost of capital. You also need to determine the firm's cash flows and estimate the firm's future earnings growth. 400-page books have been written on the above issues, and such calculations are extremely firm-specific. The DCF equation is straightforward. But the method for determining the inputs is not. The discounted cash flow valuation is the sum of the company?s cash flows, discounted at a set rate to reflect the risk of those cash flows. The formula for a discounted cash flow is written as: CFt/(1+r)t -- The cash flow for period ?t?, divided by one plus the discount rate, raised to the power of t. The value of the firm or the equity stake is the sum of the future cash flows, usually representing fixed amounts for five or 10 years, and an estimated terminal value. For additional details about how the process works, check out http://www.creativeacademics.com/finance/dcf.html#work The difficulty here is not in the calculation, but in the assumptions of future cash flows and the discount rate. The discount rate is probably the most difficult to determine. Once you have determined your inputs, the calculator at http://www.creativeacademics.com/finance/dcf.html will calculate a value for you. Alternatively, you could come up with ballpark estimates for your company and calculate an estimated valuation that will serve as a check on the other calculated values. As for developing your assumptions, I cannot help you in detail. This forum is inadequate for providing instructions, as the determination of the cost of equity, cost of capital, and cash flows are tasks both complex and company-specific. The access you have to company financial data and the quality of that data will determine the difficulty of calculating the cost of capital and estimating cash flows. However, any advice I give you without spending hours examining your company?s books and familiarizing myself with its operations would have little practical value. If your stake has a substantial value, I?d advise hiring an accountant to help you determine the inputs. Alternatively, if you have good data and don?t mind crunching numbers, I have provided some links that can help you do the math. Warning: This is not for the faint of heart. http://www.business.com/bdcframe.asp?ticker=&src=http%3A//rd.business.com/index.asp%3Fbdcz%3Dil.l.ml.e%26bdcr%3D5%26bdcu%3Dhttp%253A//www.stern.nyu.edu/%257Eadamodar/pc/model.xls%26bdcs%3D9BD1C5E4-0CE0-47CA-9EFF-A1DCAE0F177020041262915615%26bdcf%3D6e258a3a-10e2-11d4-8f60-00d0b7473557%26bdcp%3D%26partner%3Dbdc%26title%3DAswath%2520Damadoran%253A%2520Spreadsheet%2520for%2520Choosing%2520Appropriate% 2520DCF%2520Model&back=http%3A//www.business.com/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf/&path=/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf http://www.business.com/bdcframe.asp?ticker=&src=http%3A//rd.business.com/index.asp%3Fbdcz%3Dil.l.ml.e%26bdcr%3D3%26bdcu%3Dhttp%253A//www.stern.nyu.edu/%257Eadamodar/New_Home_Page/lectures/dcfinput.html%26bdcs%3D9BD1C5E4-0CE0-47CA-9EFF-A1DCAE0F177020041262915615%26bdcf%3D6e258a3a-10e2-11d4-8f60-00d0b7473557%26bdcp%3D%26partner%3Dbdc%26title%3DAswath%2520Damadoran%253A%2520Estimating%2520Inputs%252 0for%2520Discounted%2520Cash%2520Flow%2520Valuation&back=http%3A//www.business.com/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf/&path=/directory/financial_services/investment_banking_and_brokerage/mergers_and_acquisitions_manda/business_valuation_techniques/discounted_cash_flows_dcf http://www.valuatum.com/tutorials/dcf_valuation.shtml http://bluechips.uchicago.edu/dcfinput.pdf Notice that the name of Aswath Damodaran keeps coming up. He?s the hot writer on this topic, having written several books on asset valuation. If you?re serious about discounted cash flow valuation, it may behoove you to purchase one of his books, such as ?Damodaran on Valuation,? available for \$32 at half.com (http://half.ebay.com/cat/buy/prod.cgi?cpid=653235&domain_id=1856&meta_id=1) or ?Investment Valuation,? available for \$37.12 at half .com (http://half.ebay.com/cat/buy/prod.cgi?cpid=1068454050&domain_id=1856&meta_id=1). Strategy #2: Relative valuation is a much simpler method, though it?s arguably not as precise, as it does not reflect ways in which your company differs from its competitors. To use relative valuation, simply compare your company to the average valuation of its industry group. For instance, if your company had \$10 million in sales last year, and the average price/sales ratio for the industry is 2.5, then your company should be worth about \$25 million. Common valuation measures used in this fashion are price/earnings, price/sales, price/book value, and price/cash flow. As I said, this method is less precise than DCF analysis. But the advantage is that the calculations are much simpler. Determine your company?s sales, profits, book value, and cash flow. Then obtain the average valuation of the industry, and you can calculate an estimated value for your company. Keep in mind that nontraded stocks are subject to an illiquidity discount. So if a public company with a similar operating climate and similar risk is worth 15 times earnings, your private company will be worth somewhat less, perhaps 10 or 12 times earnings. Still, relative valuation can give you a ballpark figure. V```
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