Question #26

Reading: Reading 24 Private Company Valuation

PDF File: Reading 24 Private Company Valuation.pdf

Page: 13

Status: Incorrect

Correct Answer: A

Your Answer: C

Part of Context Group: Q25-26
Shared Context
- One valuation method that Smith is considering for Timber Industries involves using a growing perpetuity formula to estimate the value of intangible assets, and then adding this value to the values of working capital and fixed assets. This method is most accurately described as the: A) free cash flow method. B) excess earnings method. C) capitalized cash flow method.
Question
Which of the following statements related to discounts and premiums to benchmark for Smith's private company valuation of Timber Industries is most accurate?
Answer Choices:
A. A discount for lack of marketability should be applied when the comparables are based on public shares, and the interest in the target company is a minority interest in a private firm
B. A discount for lack of control should be applied when the comparable company values are for public shares, and the target company valuation is for a controlling interest
C. A control premium should be added when the comparable values are for the sale of an entire company, and the valuation is being done for a minority interest in the target company
Explanation
Discounts for lack of marketability are applied when the comparables are based on highly marketable securities, such as public shares, and the interest in the target company is less marketable, as in the case of a minority interest in a private firm. A discount for lack of control is applied when the comparable values are for the sale of an entire company, and the valuation is being done for a minority interest in the target company. A control premium is added when the comparable company values are for public shares or other minority interests, and the target company valuation is for a controlling interest.
Actions
Practice Flashcards