Question

When quantifying the lack of marketability discount, which of the following types of data would result in a marketability discount that is understated?

Select one:

a. Restricted stock grants.

b. IPOs.

c. Put options.

Answer 1

the discount for the lack of marketability would be understated in the option a.

marketability of shares means that the shares are highly liquid and can be converted into cash readily.

reasons as below:

An IPO would make the shares more marketable, more people would be able to purchase the shares of the company due to the company going for an IPO. the shares which are open for an IPO have a large number of subscribers. so if the marketability discount for example is 20%, it is overstated. as the shares would be more marketable as it is going for an IPO.

the put option provides the holder with downside protection, so if there is a marketability discount in the put option, it might be overstated as the holders of the put option are at an added advantage due to the downside protection it provides. as the stock is safer, it is more marketable.

the restricted stock grant is restricted, and not fully transferable until certain conditions are met. So if there exists a marketability discount, it is understated as there can be more discount because are less desirable. as further discount can be applied to arrive at the final value.