Hello Everyone,
Right now, as I write in late January, it’s busy season for many of you, though when you read this, in early April, you may find the pace is slowing. As part of this busy season, some of you, especially those in accounting firms, review valuations prepared by outside valuation firms for your firms’ audit clients. I ran across one, of a small private firm, that was generally well put together (the report, that is). However, something caught my eye: The appraiser used in the cost of equity the “10b” size premium and a 6% company specific risk premium. The WACC analysis assumed that the cost of debt was BBB. In this situation, it seemed to me that there is an inconsistency: How can such a risky company have an investment grade rating on its debt? Also, this was not a zero-debt company, where the cost of debt...
