Risk Premiums in Venture Capital Valuation

Medium Private Equity Valuation Venture Capital

During the valuation of a venture capital investment, an analyst is considering the use of the cost of capital. One approach to estimate the cost of capital is the risk-adjusted discount rate method. When applying this method for early-stage companies with high growth potential, which of the following statements about determining the appropriate risk premiums to use for the discount rate is correct?

The analyst should primarily focus on historical returns of publicly traded companies within the same industry.

A larger risk premium should be applied to account for the illiquidity and uncertainty of early-stage investments.

Risk premiums should be avoided in venture capital valuation, as they can introduce bias against new companies.

Hint

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