Advanced D P Chapter Nine Review Questions
Advanced Discounts and Premiums
SIZE AND MARKETABILITY
ADVANCED DISCOUNTS AND PREMIUMS CHAPTER 9 REVIEW QUESTIONS
© 2003–2014 Robert J. Grossman and National Association of Certified Valuators and Analysts 2014.v1
Chapter Nine – 7
SIZE AND MARKETABILITY
Advanced Discounts and Premiums
ADVANCED DISCOUNTS AND PREMIUMS CHAPTER REVIEW QUESTIONS Chapter 9: Size and Marketability 1.
What is the fundamental premise of the “size effect?” a. b. c. d.
2.
Dr. Robert Comment authored a white paper regarding the Issue of Redundancy. What was Dr. Comment’s underlying opinion on the matter? a. b. c. d.
3.
It is predicated upon empirical observations that companies of smaller size are associated with greater risk. The discount for lack of control is larger in companies which are smaller in revenue or under $1 million in sales. Larger companies or companies greater than $50 million in revenue are more difficult to sell because the buyer pool is smaller. Depending on the industry, the size of the company has no effect on the discount for lack of marketability since there are so many buyers.
Combining the discount for lack of control and marketability into one discount does not eliminate the redundancies in the discounts and undervalues the company. The determination of the size premium in the build-up model will create redundant risk on top of the market risk inherent in the rate. Fair market value is closely aligned with market value which presumes the impatience and compulsion to sell quickly. Discounting the future cash flows of a small business routinely have the effect of a huge discount for lack of size alone, any supplemental discounting for illiquidity will be redundant.
Dr. Shannon Pratt challenged Dr. Comment’s theories in 2011. Which of the following is one of Pratt’s criticisms? a.
b. c. d.
Pratt says that Comment derives his data from fairness opinions governed by family law statutes, the majority of which have significant marketability discounts, but which are not reasonable comparisons. Pratt says that all of Comment’s transactions are control transactions in privately held companies which by their nature would not have any DLOC. Pratt says many investors cherish marketability and extract a much higher cost of equity for lack of marketability compared with publicly-traded companies. Pratt claims that most companies can go public at any time and therefore have a willingness to incur IPO flotation costs of at least 6%, which goes against Comment’s premise.
8 – Chapter Nine
© 2003–2014 Robert J. Grossman and National Association of Certified Valuators and Analysts 2014.v1
SIZE AND MARKETABILITY
ADVANCED DISCOUNTS AND PREMIUMS CHAPTER 9 REVIEW QUESTIONS
© 2003–2014 Robert J. Grossman and National Association of Certified Valuators and Analysts 2014.v1
Chapter Nine – 7
SIZE AND MARKETABILITY
Advanced Discounts and Premiums
ADVANCED DISCOUNTS AND PREMIUMS CHAPTER REVIEW QUESTIONS Chapter 9: Size and Marketability 1.
What is the fundamental premise of the “size effect?” a. b. c. d.
2.
Dr. Robert Comment authored a white paper regarding the Issue of Redundancy. What was Dr. Comment’s underlying opinion on the matter? a. b. c. d.
3.
It is predicated upon empirical observations that companies of smaller size are associated with greater risk. The discount for lack of control is larger in companies which are smaller in revenue or under $1 million in sales. Larger companies or companies greater than $50 million in revenue are more difficult to sell because the buyer pool is smaller. Depending on the industry, the size of the company has no effect on the discount for lack of marketability since there are so many buyers.
Combining the discount for lack of control and marketability into one discount does not eliminate the redundancies in the discounts and undervalues the company. The determination of the size premium in the build-up model will create redundant risk on top of the market risk inherent in the rate. Fair market value is closely aligned with market value which presumes the impatience and compulsion to sell quickly. Discounting the future cash flows of a small business routinely have the effect of a huge discount for lack of size alone, any supplemental discounting for illiquidity will be redundant.
Dr. Shannon Pratt challenged Dr. Comment’s theories in 2011. Which of the following is one of Pratt’s criticisms? a.
b. c. d.
Pratt says that Comment derives his data from fairness opinions governed by family law statutes, the majority of which have significant marketability discounts, but which are not reasonable comparisons. Pratt says that all of Comment’s transactions are control transactions in privately held companies which by their nature would not have any DLOC. Pratt says many investors cherish marketability and extract a much higher cost of equity for lack of marketability compared with publicly-traded companies. Pratt claims that most companies can go public at any time and therefore have a willingness to incur IPO flotation costs of at least 6%, which goes against Comment’s premise.
8 – Chapter Nine
© 2003–2014 Robert J. Grossman and National Association of Certified Valuators and Analysts 2014.v1
