Question

1. looking at the value of a publicly traded company does not provide an indication of the value of a privately held company. True or false

2. The lack of marketability discount applies to noncontrolling ownership interest valuations. true or false

3. when recasting earnings, we must add back the items on the income statement that are in essence owner discretion items. These include owner's excessive compensation perks travel vacation homes etc. True or false

4. revenue ruling 59-60 recognizes the diffculty in valuing a privately held company, and reognizes the added value achieved by averaging various approaches to value. True or False

5. it would not be surprising for a valuator to have the same markeability discount for a controlling interest as they would when valuing a minority interest. true or false.

6. the illiquidity discount will not be applied to controlling owenership interest and business. true or false

7. histprical data is much harder to defend than future earnings forecasts, because the past financials are just history and the future is what will most likely occur. true or false

Answer 1

1. False. Using the market approach of valuation, the value of a publicly traded company is considered as the starting point. Appropriate multiple is considered for a publicly traded company, which is considered as a close comparable company. The multiple is adjusted for factors such as size, illiquidity, etc. to arrive at the adjusted multiple for the private company. The adjusted multiple is then applied to the appropriate parameter of the private company to arrive at the value using the market approach.

2. False. The lack of marketability discount applies to valuations of a privately held company. Since, a privately held company is not marketable, discount for lack of marketability (DLOM) is applied.  It is applied irrespective of controlling interest or non-controlling interest.

3. True. Owner discretion items are added back while recasting earnings, as have to arrive at the maintainbale earnings for the company. We consider items based on the standard industry norms, and not specific to the owner.

4. False. Revenue ruling 59-60 recognises the difficulty in valuing a privately held company. Because valuations cannot be made on the basis of a prescribed formula, there is no means whereby the various applicable factors in a particular case can be assigned mathematical weights in deriving the fair market value. For this reason, no useful purpose is served by taking an average of several factors (for example, book value, capitalized earnings and capitalized dividends) and basing the valuation on the result. Such a process excludes active consideration of other pertinent factors, and the end result cannot be supported by a realistic application of the significant facts in the case except by mere chance.

5. False. Typcially, discounts for lack of marketability for controlling interests is lower, compared with that for minority interests. For minority interest, a discount for lack of control is also factored in.

6. False. The illiquidity discount applies to valuations of a privately held company. Since, a privately held company is not marketable, discount for lack of marketability (DLOM) is applied. It is applied irrespective of controlling interest or non-controlling interest.

7. False. Historical data is much easier to defend than future earnings forecasts, because the business has exhibited actual performance in the past which is indisputable. Future earnings forecasts are based on judgements and estimates, hence will be harder to defend compared to historical data.