Question #42
Reading: Reading 24 Private Company Valuation
PDF File: Reading 24 Private Company Valuation.pdf
Page: 21
Status: Incorrect
Correct Answer: A
Your Answer: B
Question
Which of the following best describes the estimation of discounts for lack of marketability (DLOM) in private company valuations? The primary advantage of using put prices to estimate the DLOM over the other two methods is:
Answer Choices:
A. the volatility of the firm can be incorporated into the analysis
B. the Black-Scholes model has been shown to be valid for private firms
C. exchange traded put prices are readily available
Explanation
If an interest in a firm cannot be easily sold, a DLOM is applied. The DLOM can be
estimated using restricted share versus publicly traded share prices, pre-IPO versus post-
IPO prices, and put prices. The advantage of using put prices over the other two DLOM
estimation methods is that the estimated risk of the firm can be factored into the option
price.