Certified Valuation Analyst CVA Discounts, Premiums, and Adjustments 2 — Questions and Answers
Question 1: In the levels-of-value framework, which level sits at the top (highest value)?
- Marketable minority interest
- Non-marketable minority interest
- Controlling interest value (Correct answer)
- Liquidation value
Correct answer: Controlling interest value
The controlling interest level is at the top of the levels-of-value hierarchy because a controlling owner can direct all business decisions, command the highest price.
Question 2: Which of the following factors would most likely INCREASE the appropriate DLOM for a given interest?
- The subject company has a strong history of paying dividends
- The company has filed an S-1 registration statement indicating an imminent IPO
- The shareholder agreement prohibits the transfer of shares for 10 years (Correct answer)
- The company has an active buy-sell agreement with mandatory redemption rights
Correct answer: The shareholder agreement prohibits the transfer of shares for 10 years
A long lock-up or transfer restriction significantly reduces the ability to sell the interest, increasing the appropriate DLOM.
Question 3: Pre-IPO studies are used to estimate DLOM by comparing:
- The P/E ratios of private versus public companies in the same industry
- Transaction prices of private company shares before an IPO versus the IPO offering price (Correct answer)
- Restricted stock discounts in SEC Rule 144 filings
- The control premiums paid in merger transactions before and after going public
Correct answer: Transaction prices of private company shares before an IPO versus the IPO offering price
Pre-IPO studies examine private placement prices relative to subsequent IPO prices to quantify the discount associated with the lack of a public market.
Question 4: A key-person discount is most appropriately applied when:
- The company's revenues are highly diversified across many customers
- A specific individual's skills, relationships, or reputation are critical to the company's success (Correct answer)
- The minority discount has already been applied to the interest
- The company operates in a highly regulated industry
Correct answer: A specific individual's skills, relationships, or reputation are critical to the company's success
A key-person discount recognizes the increased risk and potential value loss if a critical individual—upon whom the business heavily depends—were to leave.
Question 5: The Quantitative Marketability Discount Model (QMDM) developed by Mercer primarily considers which variables?
- Industry multiples, leverage ratios, and working capital requirements
- Expected holding period, interim distributions, required rate of return, and expected growth (Correct answer)
- EBITDA margins, capital expenditure needs, and terminal growth rates
- Restricted stock discounts, pre-IPO discounts, and option-pricing inputs
Correct answer: Expected holding period, interim distributions, required rate of return, and expected growth
The QMDM is a discounted cash flow model at the shareholder level that incorporates holding period, expected dividends or distributions, required return, and expected value growth.
Question 6: When applying a portfolio discount in business valuation, the analyst is accounting for:
- The diversification benefit of holding multiple asset classes
- The fact that a conglomerate's business units may be worth more if sold separately than as a combined entity (Correct answer)
- The reduced risk profile of a company with multiple revenue streams
- The minority discount applicable to each division's equity interest
Correct answer: The fact that a conglomerate's business units may be worth more if sold separately than as a combined entity
A portfolio (or conglomerate) discount reflects the market's tendency to value diversified conglomerates at a discount to the sum of their parts when sold individually.
Question 7: Which empirical data source is most commonly cited for control premiums in acquisitions of publicly traded companies?
- BIZCOMPS transaction database
- The Pratt's Stats database
- Mergerstat/BVR Control Premium Study (Correct answer)
- IRS Estate and Gift Tax Rulings
Correct answer: Mergerstat/BVR Control Premium Study
The Mergerstat/BVR Control Premium Study compiles control premiums paid over pre-announcement public market prices in U.S. mergers and acquisitions.
Certified Valuation Analyst CVA Discounts, Premiums, and Adjustments 2
In the levels-of-value framework, which level sits at the top (highest value)?