Which sequence describes the steps to calculate beta for a private company?

Which sequence describes the steps to calculate beta for a private company?

• A. Take public comparables beta and unlever them; average the unlevered betas; relever to target capital structure.
• B. Use the private company's own beta from internal reports
• C. Use industry beta without adjustments
• D. Use the risk-free rate only

Answer: (C)

Beta for a private company isn’t directly observable in the market, so you estimate it from similar public companies to reflect business risk while adjusting for financing. The standard approach is to take betas from public comparables, remove the effect of leverage to get an asset (unlevered) beta, average those unlevered betas to capture the typical business risk, and then apply the private company’s target capital structure by relevering that average to its debt/equity mix (and tax rate). This yields a levered beta that matches the private firm’s risk profile and financing mix, which you then use in CAPM to estimate the cost of equity. Using an industry beta without adjustments isn’t ideal because it blends many firms with different risk profiles and capital structures, so it may misstate the private company’s specific business risk and leverage. Relying on the private company’s own beta from internal reports isn’t practical since private firms don’t have a publicly observable beta, and internal data may not be comparable or stable. Using only the risk-free rate omits market risk altogether and thus fails to capture systematic risk that matters for pricing equity.

Beta for a private company isn’t directly observable in the market, so you estimate it from similar public companies to reflect business risk while adjusting for financing. The standard approach is to take betas from public comparables, remove the effect of leverage to get an asset (unlevered) beta, average those unlevered betas to capture the typical business risk, and then apply the private company’s target capital structure by relevering that average to its debt/equity mix (and tax rate). This yields a levered beta that matches the private firm’s risk profile and financing mix, which you then use in CAPM to estimate the cost of equity.

Using an industry beta without adjustments isn’t ideal because it blends many firms with different risk profiles and capital structures, so it may misstate the private company’s specific business risk and leverage. Relying on the private company’s own beta from internal reports isn’t practical since private firms don’t have a publicly observable beta, and internal data may not be comparable or stable. Using only the risk-free rate omits market risk altogether and thus fails to capture systematic risk that matters for pricing equity.