Certified Valuation Analyst Asset-Based Approach and Specialized Topics 3 — Questions and Answers
Question 1: In valuing a 25% non-controlling interest, which two discounts are most commonly considered?
- Discount for lack of control and discount for lack of marketability (Correct answer)
- Built-in gains discount and key-person discount
- Blockage discount and trapped-in capital gains discount
- Control premium and synergy premium
Correct answer: Discount for lack of control and discount for lack of marketability
Minority interests typically warrant a discount for lack of control and a discount for lack of marketability.
Question 2: A 'key-person discount' adjusts value to reflect what?
- Dependence on an individual whose loss would harm the business (Correct answer)
- The cost of replacing inventory
- A premium for a controlling shareholder
- The tax on appreciated assets
Correct answer: Dependence on an individual whose loss would harm the business
A key-person discount accounts for the risk that the business depends heavily on one critical individual.
Question 3: The excess earnings method (formula method) allocates value between which two components?
- Tangible asset value and intangible (goodwill) value (Correct answer)
- Debt and equity
- Current and long-term assets
- Marketable and non-marketable securities
Correct answer: Tangible asset value and intangible (goodwill) value
The excess earnings method separates a return on tangible assets from excess earnings attributable to intangibles.
Question 4: Revenue Ruling 59-60 is most associated with valuation of what?
- Closely held company stock for tax purposes (Correct answer)
- Publicly traded bonds
- Real estate investment trusts
- Foreign currency holdings
Correct answer: Closely held company stock for tax purposes
Revenue Ruling 59-60 provides factors for valuing closely held company stock, especially for estate and gift tax.
Question 5: Which factor is NOT one of the eight factors outlined in Revenue Ruling 59-60?
- The optimal capital structure target ratio (Correct answer)
- The economic outlook and condition of the industry
- The book value and financial condition of the company
- The earning capacity of the company
Correct answer: The optimal capital structure target ratio
An optimal capital structure target is not among the eight enumerated factors of Revenue Ruling 59-60.
Question 6: A control premium is the inverse mathematical relationship to which discount?
- Discount for lack of control (Correct answer)
- Discount for lack of marketability
- Key-person discount
- Blockage discount
Correct answer: Discount for lack of control
A control premium and a discount for lack of control are mathematically related as reciprocals of one another.
Question 7: When valuing a fractional interest in real estate held through an entity, which discount is frequently applied?
- Discount for lack of control and marketability combined (Correct answer)
- Built-in gains tax credit
- Going-concern premium
- Replacement cost premium
Correct answer: Discount for lack of control and marketability combined
Fractional entity interests in real estate commonly receive combined discounts for lack of control and marketability.
Certified Valuation Analyst Asset-Based Approach and Specialized Topics 3
In valuing a 25% non-controlling interest, which two discounts are most commonly considered?