Chapter 9 Flashcards
What are the four types of models to identify and quantify valuation adjustments?
1) Theoretical models - top down and horizontal
2) Original empirical models - similar ownership rights
3) Inferential models - premiums paid for control
4) Precedential models - court decisions
What do investors require as a result of being generally risk averse?
Higher returns in exchange for accepting higher levels of risk
What are the levels of value?
Control strategic (public or private) Minority/control standalone liquid (public) Control liquid (private) Control standalone (private) Minority, nonmarketable (private)
What level of value result from the GPC method of the market approach?
Control or minority, marketable
What level of value result from the M&A method with public company transaction of the market approach?
Control, marketable
What level of value result from the M&A method with private company transaction of the market approach?
Control, nonmarketable
What level of value result from the adjusted book value method of the asset approach?
Control, marketable
What level of value result from the liquidation method of the asset approach?
Control, marketable
What level of value result from the cost to create method of the asset approach?
Control, marketable
What level of value result from the capitalization of benefits method of the income approach?
Control or minority, marketable or nonmarketable
What level of value result from the discounted future benefits method of the income approach?
Control or minority, marketable or nonmarketable
What level of value result from the excess earnings method of the income approach?
Control, marketable or nonmarketable
What does marketable refer to?
Values derived from public marketplace and assumes that a certain amount of liquidity is embedded in the value
What does nonmarketable refer to?
Values derived from the closely held marketplace and that a certain amount of lack of liquidity is built into the value
What are the levels of ownership?
Control interests
1) 100 percent ownership
2) Ownership sufficient to liquidate or merge
3) 51 percent operating control
Minority interests
4) 50-50 ownership
5) Less than 50 percent, but the largest block of stock ownership
6) Less than 50 percent, but with swing vote powers
7) Less than 50 percent, but with cumulative voting powers
8) Pure minority interests
What 10 facts and circumstances affect adjustments?
1) Purpose of the valuation
2) Ownership interest being valued
3) Ownership structure of the entity
4) Size of block of stock being valued
5) Financial condition and structure of the subject
6) Stock related issues such as dividend policy and history, stock redemption policies, and restrictions on sale of stock
7) State statutes
8) Desirability of and potential market or lack thereof for subject
9) Potential synergies or lack thereof with potential buyers
10) Prospect of an IPO or sale
The concept of minority interest addresses what?
The degree of control or lack of control
The concept of marketability addresses what?
The ability to liquidate an investment in a timely and certain manner
What is addressed first, control or marketability issues and why?
Control and then and only then marketability because the size of the block being valued should be considered in determining the marketability discount
Does the sum of the parts of minority blocks equal the value of the whole enterprise?
No, often minority blocks in the absence of a swing vote are usually less due to lack of control and other factors
What is the definition of control?
Generally the ownership of more than 50 percent of the voting stock or other ownership interest in a business enterprise
What source provides information about the definition of control which may override the terms of an agreement?
State statutes
What 6 abilities of the controlling ownership interest result in a premium for control?
1) Implement business and operational changes
2) Appoint and remove management, appoint self to BOD
3) Control the timing and amount of cash distributions
4) Purchase, sell, convey, exchange, pledge, hypothecate, encumber, and lease the property (tangible and intangible) of the business
5) Enter into, and abrogate, agreements on behalf of the business
6) In general, cause the company to do whatever subject to the law and public policy
What are the two methods to discount for lack of control?
1) Estimate the value of the equity of the total enterprise on a controlling basis (cash flows adjusted for controlling items), compute the minority pro rata interest in the total, and estimate the amount of discount for lack of control applicable
2) use cash flows available to the minority owner