Explain what has to be adjusted when setting the discount rate for a private firm

Discount rates for private companies need several adjustments. Size premiums are often added for small companies, though the evidence is debated and they may overlap with other premiums. The cost of debt is often higher because private companies borrow on worse terms, which raises the WACC, and actual leverage may not reflect a sustainable target structure. Management projections may be optimistic; the analyst can add a premium, although adjusting the forecast is usually better. Company-specific premiums for concentration or dependence on a key person are subjective. In an acquisition, the rate should reflect the risk of the target, not the buyer. The trap is counting the same risk twice, for example through both a specific premium and a marketability discount.