The first part is the mid-year convention. It is not necessary and can be dropped if you want. The mid-year convention just says that cash flows arrive, on average, midway through each year rather than at the end, to get a slightly more accurate measure of the PV. But it makes a marginal difference at best and can be ignored.

You can’t, it’s arbitrary. People use something in that range depending on how close the company is to a larger public company.

I am confused about “you almost always apply a private company or “illiquidity” discount, which often ranges from 10% to 30%, to these multiples.” I am not sure how to get illiquidity discount number, how can I get this information or calculate this number? Thank you!

Debt principal repayments do not factor into Unlevered FCF. That is the whole point of using an “Unlevered” metric, you ignore capital structure.

If the company’s capital structure changes significantly over time (e.g., 30% Debt to 50% Debt… not 49% to 50%), you might adjust WACC or up or down by the end of the forecast period and use a cumulative discount factor rather than one number for the discounting.

Thanks for sharing you insight into private company valuation!

Have a question though. Assume you made principal repayment for your debt each year, and while the Unlevered Free Cash Flow wouldn’t be impacted, what about your WACC? Assuming the Cost of Debt is still below Cost of Equity, shouldn’t WACC goes up and then EV goes down?

And would public company give similar rationale like private company given the debt repayment? Thanks

Sorry, I don’t know. We have a few examples of more qualitative cases submitted by students in previous years, but they’re usually fairly simple – “look at this business and identify the key risks, growth areas, and explain how you would approach the valuation” – usually something like that. My advice is to read quickly, simplify, and avoid over-thinking the points because they just want a quick assessment.

Private companies still have shares… it’s just that their *share price* is not easy to establish because the shares are not publicly traded. This is a common myth/misconception about private companies.

So, accretion/dilution still applies, though private companies tend to care less about EPS than public companies. You could also look at a Contribution Analysis or IRR vs. WACC analysis or just complete a simple valuation of the private company (or see if the deal boosts the buyer’s implied value by valuing it before and after the deal).

Thanks for sharing the information on valuing private companies? I just have a question: how to evaluate private acquisitions ( e.g. a private company acquires another private company – accretion/dilution doesn’t work because there is no shares outstanding right? so instead of a merger model, what do bankers use?