CVA Discounts, Premiums, and Adjustments Flashcards

A swing vote premium is most likely relevant when:

Answer: A minority block of shares can determine the outcome of a shareholder vote when other blocks are evenly divided

A swing vote premium applies when a minority block has disproportionate power because it can tip the balance between two otherwise evenly split factions.

Normalizing adjustments in business valuation are made primarily to:

Answer: Restate financial results to reflect the economic earnings of the business as if it were optimally operated under a hypothetical buyer

Normalizing adjustments eliminate non-recurring, non-operating, or non-arm's-length items to present the sustainable economic earnings available to a hypothetical purchaser.

An S corporation discount (or premium) in business valuation arises because:

Answer: S corporation earnings pass through to shareholders, potentially avoiding the double taxation applicable to C corporations

Because S corporation income is taxed only at the shareholder level (avoiding corporate-level tax), the pass-through tax benefit can warrant a valuation premium over an equivalent C corporation.

Which of the following best describes a built-in gains (BIG) discount?

Answer: A discount applied to reflect the embedded tax liability in an S corporation that converted from a C corporation within the recognition period

The BIG discount accounts for the potential tax liability on unrealized gains held in an S corporation that converted from a C corporation if those gains are recognized within the statutory recognition period.

Which factor would most likely DECREASE the appropriate minority interest discount?

Answer: The company operates as a holding company with publicly traded securities as its primary asset

When a company's primary assets are publicly traded securities, minority shareholders can indirectly access liquidity and the value of those assets is readily determinable, reducing the minority discount.

The 'blockage discount' in valuation refers to:

Answer: A discount for a large block of shares that cannot be sold quickly without depressing the market price

A blockage discount accounts for the fact that a large block of shares, if sold all at once, would likely depress the market price due to the increased supply relative to normal trading volume.

Under Revenue Ruling 59-60, which of the following is identified as one of the eight factors to consider when valuing closely held stock?

Answer: The economic outlook in general and the condition and outlook for the specific industry

Rev. Rul. 59-60 explicitly lists the economic outlook in general and the specific industry's condition as one of the eight key factors in valuing closely held stock for estate and gift tax purposes.