Exam 10: Analysis and Valuation of Privately Held Companies

Fair value is by necessity more subjective than the concept of fair market value,because it represents the dollar value of a business based upon an appraisal of the tangible and intangible assets of the business.

Employee benefit levels in private firms are almost always mandated by state or federal law and therefore cannot be changed.

Membership or subscription businesses,such as health clubs and magazine publishers,may inflate revenue by booking the full value of muliyear contracts in the first year of the contract.

A minority discount is the reduction in the value of a minority investor's investment because minority owners have little influence in how the firm is managed.

Which of the following are often true about the challenges of valuing private firms?

Case Study Short Essay Examination Questions GHS Helps Itself by Avoiding an IPO In 1999, GHS, Inc., a little known supplier of medical devices, engineered a reverse merger to avoid the time-consuming, disclosure-intensive, and costly process of an initial public offering to launch its new internet-based self-help website. GHS spun off its medical operations as a separate company to its shareholders. The remaining shell is being used to launch a ''self-help'' Website, with self-help guru Anthony Robbins as its CEO. The shell corporation will be financed by $3 million it had on hand as GHS and will receive another $15 million from a private placement. With the inclusion of Anthony Robbins as the first among many brand names in the self-help industry that it hopes to feature on its site, its stock soared from $.75 per share to more than $12 between May and August 1999. Robbins, who did not invest anything in the venture, has stock in the new company valued at $276 million. His contribution to the company is the exclusive online rights to his name, which it will use to develop Internet self-help seminars, chat rooms, and e-commerce sites. : -What are the advantages of employing a reverse merger strategy in this instance?

If the discount rate is assumed to be 8% and the current cash flow is $1.5 million and is expected to remain at that level in perpetuity,the implied valuation is $18.75 million.

Leveraged employee stock ownership plans are frequently used by owners of private businesses to

The fair value concept is applied when no strong market exists for a business or it is not possible to identify the value of substantially similar firms.

Both public and private firms always attempt to maximize earnings growth.

Despite the lack of public exchanges for privately held firms,Wall Street analysts have ample incentive to analyze such firms in search of emerging companies.

Intangible assets such as customer lists,intellectual property,licenses,distributorships agreements,leases, regulatory approvals,and employment contracts may offer significant sources of value.

A pure control premium is the value the acquirer believes can be created by replacing the target firm's incompetent management,by changing the strategic direction of the target,by gaining a foothold in a market not currently served,or by achieving unrelated diversification.

There is widespread agreement over the magnitude of the liquidity discount.

If the cash flows of the firm are not expected to grow or are expected to grow at a constant rate indefinitely,the discount rate used by practitioners often is referred to as the capitalization rate.

An investor in a small company generally has little difficulty in selling their shares because of the high demand for small businesses.

Very few closely held businesses are family owned.