Given a text T, and several options, according to the question posed in the text T to choose the most appropriate option from the options as the answer, please directly output the most appropriate option, do not need to output the explanation.

Alan Chin, the chief executive officer of Thunder Corporation, has asked his chief financial officer, Constance Ebinosa, to prepare a valuation of Thunder for the purpose of selling the company to a private investment partnership. Thunder is a profitable $200 million annual sales US domiciled manufacturer of generic household products. Customers consist of several grocery store chains in the United States. Competitors include large companies such as Procter & Gamble, Clorox, and Unilever. Thunder has been in business for 15 years and is privately owned by the original shareholders, none of whom are employed by the company. The company’s senior management has been in charge of the company’s operations for most of the past 15 years and expects to remain in that capacity after any sale.The partnership has expectations about Thunder similar to the current shareholders and management of Thunder. These investors expect to hold Thunder for an intermediate period of time and then bring the company public when market conditions are more favorable than currently.Chin is concerned about what definition of value should be used when analyzing Thunder. He notes that the stock market has been very volatile recently. He also wonders whether fair market value can be realistically estimated when the most similar recent private market transactions may not have been at arm’s length.Chin asks Ebinosa whether there will be differences in the process of valuing a private company like Thunder compared with a public company. Ebinosa replies that differences do exist and mentions several factors an analyst must consider.Ebinosa also explains that several approaches are available for valuing private companies. She mentions that one possibility is to use an asset-based approach because Thunder has a relatively large and efficient factory and warehouse for its products. A real estate appraiser can readily determine the value of these facilities. A second method would be the market approach and using an average of the price-to-earnings multiples for Procter & Gamble and Clorox. A third possibility is a discounted free cash flow approach. The latter would focus on a continuation of Thunder’s trend of slow profitable growth during the past ten years.The private investment partnership has mentioned that they are likely to use an income approach as one of their methods. Ebinosa decides to validate the estimates they make. She assumes for the next 12 months that Thunder’s revenues increase by the long-term annual growth rate of 3 percent. She also makes the following assumptions to calculate the free cash flow to the firm for the next 12 months:● Gross profit margin is 45 percent. ? Depreciation is 2 percent of revenues.● Selling, general, and administrative expenses are 24 percent of revenues.● Capital expenditures equal 125 percent of depreciation to support the current level of revenues.● Additional capital expenditures of 15 percent of incremental revenues are needed to fund future growth.● Working capital investment equals 8 percent of incremental revenues.● Marginal tax rate on EBIT is 35 percent.Chin knows that if an income approach is used then the choice of discount rate may have a large influence on the estimated value. He makes two statements regarding discount rate estimates:1. If the CAPM method is used to estimate the discount rate with a beta estimate based on public companies with operations and revenues similar to Thunder, then a small stock premium should be added to the estimate.2. The weighted average cost of capital of the private investment partnership should be used to value Thunder.Ebinosa decides to calculate a value of Thunder’s equity using the capitalized cash flow method (CCM) and decides to use the build-up method to estimate Thunder’s required return on equity. She makes the following assumptions:● Growth of FCFE is at a constant annual rate of 3 percent.● Free cash flow to equity for the year ahead is $2.5 million.● Risk free rate is 4.5 percent.● Equity risk premium is 5.0 percent.● Size premium is 2.0 percent.
Regarding the two statements about discount rate estimates, Chin is:
Option A:correct with respect to adding the small stock premium and correct with respect to the weighted average cost of capital.
Option B:correct with respect to adding the small stock premium and incorrect with respect to the weighted average cost of capital.
Option C:incorrect with respect to adding the small stock premium and incorrect with respect to the weighted average cost of capital.

Answer: C