Heads-Up12: DLOC and DLOM

[Dreary]

You have determined that the discount for lack of control (DLOC) =25% and the discount for lack of marketability (DLOM) =10%, in a private company valuation. What is the total disount that should be applied?
A. 27.5%
B. 32.5%
C. 35%

 

[Dreary]

Explain anyway.

 

[summerside182]

1- ( 1- DLOC ) (1-DLOM) = total disc

 

[Dreary]

That’s why I posted this…why cram too many formulas into your memory?
Take the second discount off of the already discounted value…so you first take the 25% disount, then take 10% of the remaining 75%: 25% + 10% (75%) = 32.5%.

 

[Clark_CFA_Candidate]

So, where do we apply this discount? For estimating the PV of a PE investment?

 

[Dreary]

Not for PE but for private company valuation. You knock off DLOC and DLOM from equity value, so that you pay less because of these risks.

 

[Clark_CFA_Candidate]

OK, but how is that different than PE?

 

[Dreary]

PE is a different topic under Alt Inv,while company valuation is under equity. Are they related somehow? Probably, but in PE the focus is mainly on calculations of returns and accounting stuff of GP and LP’s, etc.

 

[Clark_CFA_Candidate]

Thank you. After all, the correct answer is whatever CFAI says is correct. I just want to know that, and not confuse myself or get wrapped up in semantics or anything! Thanks.