Question #19 - Reading 19 Equity Valuation - Applications and Processes

Reading: Reading 19 Equity Valuation - Applications and Processes

PDF File: Reading 19 Equity Valuation - Applications and Processes.pdf

Page: 8

Status: Correct

Correct Answer: A

Shared Context

- Consider the steps in the top down valuation approach as it is applicable for Gold Star. Dentice should forecast the growth of: A) the overall economy, growth of the industry, and the growth rate of Gold Star. B) Gold Star, the growth of the oil industry, and then the growth of the overall economy. C) each firm in the oil industry, the growth rate of the oil industry, and the growth rate of the economy.

Question

Which discounts must be taken into account while valuing the investment opportunity? Joe should take into account the:

Answer Choices:

A. marketability, liquidity, and majority discounts in the valuation

B. marketability, liquidity, and minority discounts in the valuation

C. marketability, liquidity, and control premium in the valuation

Explanation

Since Gold Star is closely held, the investment is not easily marketable. Closely linked is the fact that the investment cannot be easily liquidated and the cost of selling the investment needs to be discounted from the value. Finally, since only 5% of the stock is being invested in, the control of the operations of the company still remains with the majority shareholders. This lack of control needs to be quantified and discounted from Gold Star's valuation.

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