The resulting WACC determined using guideline companies as the proxy for the Market Participant WACC provides us with a “floor” return. Average industry weight of debt-to-equity is also readily available for most of the guideline companies and is typically used to weight the debt and equity. Use of the CAPM build up method is typical, as many sources provide the requisite data to perform the exercise. Therefore, all three types of market participant buyers should be represented in the analysis.Īfter selection of the Guideline Companies, an estimate of the ‘market’ cost of capital is performed. The financial buyer will most likely look to this same pool of potential investors to aid in their determination of required return based on the return of the respective industry. Entities reporting in the SIC codes will fit into the two categories of market participant that are in the same industry as the subject. One method used to estimate the MPRR is to assess publicly-traded companies which are in the same two or four digit SIC code as the target. Where does one look for a proxy for the MPRR? Might firms in the same industry as the subject of the appraisal be considered Market Participants? Are actual bidders in the auction process on the purchase of the entity Market Participants? What about firms contacted by the investment banker for the seller? What happens when the acquired entity was purchased in a stressed situation or without the auction process? The facts and circumstances of each engagement must be assessed when answering these questions. The Market Participant Rate of Return (“MPRR”) is the return required by the Market Participant to enter into the investment. Willing to transact for the asset or liability (that is, they are motivated but not forced or otherwise compelled to do so).”Ī Market Participant will fall into one of three categories a buyer who is in the same business segment of the industry as the taret, to the extent that the buyer provides the same service or product a buyer who is in the same general market place or industry with the target, providing ancillary products or services, that wishes to enter into the same business segment as the target or a purely financial buyer, an example of which is a private equity group. Able to transact for the asset or liability.Ĥ. Knowledgeable, having a reasonable understanding about the asset or liability and the transaction based on all available information, including information that might be obtained through due diligence efforts that are usual and customary.ģ. Independent of the reporting entity (that is, they are not Related Parties).Ģ.
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