Question

You have valued a business, using discounted cash flow models, at $250 million for a private sale. The business, which does make money, had revenues of $200 million in the most recent year. (The average firm has revenues of $10 million.) How much of a liquidity discount would you apply to this firm: a. Based on the Silber regression? (please show formula and step by step work explanation) b. Based on correcting the average discount (25%) for the size of the firm?

Answer 1

The liquidity discount for a firm can be determined based on the Silber regression or by correcting the average discount for the size of the firm.

Step-by-step explanation:

The liquidity discount for a firm can be determined based on the Silber regression or by correcting the average discount for the size of the firm.

a. The Silber regression involves using a regression equation to estimate the liquidity discount. The formula for the Silber regression is: Liquidity discount = Intercept + (Coefficient x (Revenues of the firm - Average revenues of all firms))

b. Correcting the average discount for size involves adjusting the average discount based on the difference between the revenues of the firm and the average revenues of all firms. If the firm's revenues are higher than the average, the discount may be lower, and if the firm's revenues are lower than the average, the discount may be higher.