An analyst valuing the non-controlling shares of a closely held company is using a similar firm quoted on the NASDAQ with relatively high trading volume as his base for a comparable company analysis. He is most likely to use the shares of the publicly traded comparable company and apply:
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A. B. C.A
In this scenario, the analyst is valuing the non-controlling shares of a closely held company using a comparable company analysis. The analyst is using a publicly traded company listed on the NASDAQ with high trading volume as the basis for comparison.
When valuing non-controlling shares, it's important to consider the fact that these shares typically have limitations and restrictions compared to controlling shares. Two common discounts applied to reflect these limitations are the marketability discount and the minority interest discount.
Marketability Discount: Non-controlling shares are often less liquid and more difficult to sell compared to publicly traded shares. This lack of marketability reduces their value. Therefore, a marketability discount is applied to reflect this lower level of liquidity. The discount compensates for the illiquidity of the shares and the associated costs and risks of selling them. Applying a marketability discount is intended to adjust the valuation of the closely held company's non-controlling shares to reflect their reduced marketability.
Minority Interest Discount: Non-controlling shares also lack the ability to control or influence the decision-making process within the closely held company. Controlling shares typically possess voting rights and the ability to influence strategic decisions. In contrast, non-controlling shareholders have limited control and are subject to the decisions made by the majority shareholders. To account for this lack of control, a minority interest discount is applied. This discount reflects the reduced value of non-controlling shares due to their limited influence over the company's operations and strategic direction.
Given the above explanation, the analyst in this case is likely to apply both a marketability discount and a minority interest discount. By using a publicly traded comparable company as a basis, the analyst can assess the market value of the comparable company's shares, which already reflects the liquidity and control considerations. However, since the non-controlling shares being valued in the closely held company are subject to limitations and lack control, the analyst needs to adjust the valuation by applying both a marketability discount and a minority interest discount to capture these differences. Therefore, the correct answer is C. both a marketability and minority interest discount.