Certified Valuation Analyst CVA Discounts, Premiums, and Adjustments 3

Question 1

A swing vote premium is most likely relevant when:

Accepted Answer

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

Answer

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

Question 2

Normalizing adjustments in business valuation are made primarily to:

Accepted Answer

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

Answer

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

Question 3

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

Accepted Answer

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

Answer

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.

Question 4

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

Accepted Answer

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

Answer

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.

Question 5

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

Accepted Answer

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

Answer

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.

Certified Valuation Analyst Practice Test

Certified Valuation Analyst Practice Test

Certified Valuation Analyst CVA Discounts, Premiums, and Adjustments 3