Question

Which of the following are generally true about the challenges of valuing private firms?

There is a lack of analyses generated by sources outside of the company.

Financial reporting systems are often inadequate.

Management depth and experience is often limited.

Reported earnings are often understated to minimize taxes.

All of the above.

Answer 1

Which of the following are generally true about the challenges of valuing private firms?

correct answer : All of the above.

1. There is a lack of analyses generated by sources outside of the company :

As date are not available as freely for public companies, it is difficult to arrive at meaningful & concrete analysis.

2. Financial reporting systems are often inadequate.

Some private firm financial statements are reviewed rather than audited; some may be only compiled (i.e., no auditor opinion is provided). so there may be chances of manipulation by private firms

3. Management depth and experience is often limited.

management is not that great because we generally see that they are generally self-made businessmen but they do not have management knowledge. secondly, as they are new start ups, the experience is also not that great

4. Reported earnings are often understated to minimize taxes.

The private companies try to manipulate incomes & expenses and thereby minimize taxes. and as we said earlier the compliance system is not that great so these things take place

so all of above are applicable