- CFA Exams
- CFA Level I Exam
- Topic 5. Equity Valuation
- Learning Module 25. Private Company Valuation
- Subject 1. Private and Public Company Valuation: Similarities and Contrasts
CFA Practice Question
One company-specific factor, size, is used to compare private and public companies. Private companies are typically smaller. The size implications are:
II. Small size may reduce growth prospects by reducing access to capital to fund growth of operations.
III. Small size may incur more operating costs such as compliance costs.
I. There are risk premiums for small size when estimating required rates of return for small companies.
II. Small size may reduce growth prospects by reducing access to capital to fund growth of operations.
III. Small size may incur more operating costs such as compliance costs.
Correct Answer: I and II
Compliance costs are typically costs for public companies.
User Contributed Comments 3
| User | Comment |
|---|---|
| davidt876 | III is definitely right. a. private companies can have high compliance costs if they operate in a regulated industry (insurance, investment, banking) b. there are plenty of other operating costs that are relatively higher for smaller companies - that's why economies of scale is a thing |
| michaelcfa | III is not right. Public companies get funding from public investors and are subject to more scrutinies such as NYSE. Private companies sometimes don't even have to publish their financial statements. |
| ashish100 | Davids trying his best to pass the exam.... by giving you wrong info lol jk I agree with michaelfakecfa google if u have to |