Valuations using a proxy company - part 3

In this lesson

1. 0:00 Introduction to the Jesko and Mickey Co acquisition
2. 1:29 Step one: Calculate the asset beta from equity beta
3. 3:43 Step two: Use CAPM to find ungeared cost of equity
4. 5:18 Step three: Calculate weighted average cost of capital
5. 7:31 Step four: Value the business using perpetuity formula
6. 8:59 Summary and key takeaways

About this lesson

You'll work through a four-step process: extracting and ungearing the proxy company's equity beta to find the asset beta, using CAPM to calculate an ungeared cost of equity, regearing that cost using the acquiring company's capital structure to find WACC, and finally discounting the target's cash flows using that WACC. This method is essential when you need to value a business without direct market data of your own. The lesson walks through a realistic exam scenario where Jesko is acquiring Mickey Co's trade. You'll see how to handle equity betas, debt values, and share prices to calculate the proxy company's equity beta of 1.85, then strip out the effect of Mickey's debt to find the asset beta of 1.4. From there, you'll apply CAPM using the risk-free rate and market risk premium to get an ungeared cost of equity, then re-lever it using Jesko's own 60% equity and 40% debt financing structure to arrive at a WACC of 15.84%. Finally, you'll discount Mickey's $13 million annual post-tax cash flow as a perpetuity using that WACC to reach a valuation of just over $82 million. The lesson emphasises practical calculator techniques and explains what each beta figure actually means—helping you understand not just the mechanics, but the economic logic behind why this approach works for acquisition valuations.

Duration: 10m