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CFA Level I · CFA Level I Exam · Equity Instrument Features

An investor values a stake in a privately held firm using the price of comparable listed companies. To reflect the lack of a ready market for the stake, the investor will most likely apply:

The investor will most likely apply a discount for lack of marketability. Private equity stakes lack a ready, liquid market, so values based on liquid public comparables are reduced. Control premiums and lack-of-control discounts relate to the degree of influence of the stake, not to liquidity.

  1. Aa control premium to the comparable-based value
  2. Ba discount for lack of marketability to the comparable-based valueCorrect
  3. Ca discount for lack of control to the comparable-based value

Explanation

Private shares cannot be sold quickly at a known price, so valuations derived from liquid public comparables are reduced by a discount for lack of marketability. A control premium or a lack-of-control discount addresses the influence the stake gives, not the absence of a ready market.

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