Page 57 - FINAL CFA II SLIDES JUNE 2019 DAY 8

LOS 33.k: Explain and evaluate the effects on READING 33: PRIVATE COMPANYVALUATION
private company valuations of discounts and
premiums based on control and marketability.
MODULE 33.4: VALUATION DISCOUNTS

EXAMPLE: Calculating the value of a minority interest: Suppose that a minority shareholder holds 15% of a private firm’s equity and that
the CEO holds the other 85%:
• Scenario 1, CEO will likely sell the firm very soon. Valuation discounts will be very small. A DLOM of 5% will be applied and a DLOC will
not be applied under the assumption that all selling shareholders will receive the same price. Vo of equity is estimated at $10 million.
• Scenario 2, CEO has no plans to sell the firm, and the minority shareholder cannot sell its interest easily. A DLOM of 20% will be applied. A
DLOC will be estimated by using reported earnings instead of normalized earnings to provide an estimated firm equity value of $9 million.
Given these figures, calculate the value of the minority shareholder’s equity interest under both scenarios.

The smaller value of
the minority interest
in Scenario 2 is due
to the higher DLOM
and the DLOC (as
reflected in the lower
firm equity value of
$9,000,000).

The $9,000,000 value
assumes that certain
firm inefficiencies
(e.g., above-market
compensation for the
owner) cannot be
corrected without a
sale of the firm.