Closely held companies

[vitamin]

I'm lost on the valuation of closely held companies, which showed up toward the end of book 4 Schweser.

I guess I am confused by the: Control / minority & discount / premium concept

What does this example mean?? (book 4 p.202)

"If the base value used is the market price of publicly traded shares, the valuation of a majority interest in a closely held company may require the application of discount for lack of liquidity and marketability and of a premium for control"

 

[tysksmurf]

Hello,
base value=calculated value in whichever way

when you hold the majoity of the shares you will not be able to sell the shares to this price, because as soon as you start selling a portion, the price will go down (remember, demand-supply...) and you will only be able to sell the rest for a lower price. Let alone that there must be enough liquidity in the market to buy all your shares. Therefore deduct some value, or in other word use a discount.

On the other hand if you own the majority of the shares you have the right to take decisions with your votes for the company. This is power (an additional value) when you sell the shares and has an intrinsic value therefore.

Hope this helps

 

[vitamin]

yes it helps. thanks!!