If a Firm Is Privately Owned, and Its Stock Is

question 14

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 DCF 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:

Diazomethane

A highly reactive, carcinogenic organic compound employed in methylating agents and as a precursor to carbenes; characterized by the formula CH2N2.

Carbene

A highly reactive molecule containing a carbon atom with two nonbonded electrons and bonded to two atoms typically forming a divalent species.

Relative Reactivity

A comparison of the reactivity rates of different substances under the same conditions, indicating how easily one substance reacts relative to another.

Secondary Hydrogens

Hydrogen atoms attached to a carbon atom bonded to two other carbon atoms.