If a Firm Is Privately Owned, and Its Stock Is

question 22

True/False

If a firm is privately owned, and its stock is not traded in public markets, then we cannot measure its beta for use in the CAPM model, we cannot observe its stock price for use in the dividend growth model, and we don't know what the risk premium is for use in the bond-yield-plus-risk-premium method.All this makes it especially difficult to estimate the cost of equity for a private company.

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Definitions:

Net Present Value

A financial metric that calculates the value of a series of cash flows by discounting them to present value using a specific rate, often used in capital budgeting.

Cost of Capital

The rate of return that a company must earn on its investment projects to maintain its market value and attract funds.

Cost of Capital

The return rate that a company must earn on its projects to maintain its market value and attract funds.