Page 55 - FINAL CFA II SLIDES JUNE 2019 DAY 8
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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 (DLOM = 5% and a DLOC 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%. 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.
Smaller minority interest value in Scenario 2 is due to the higher DLOM and DLOC (reflected in lower firm equity value of $9,000,000).
The $9,000,000 assumes inefficiencies such as above-market compensation for the owner cannot be corrected without a sale of the firm.
