Reading 74: Alternative Investments-LOS m 习题精选 2011, companies, valuation, research, center

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Session 18: Alternative Investments
Reading 74: Alternative Investments

LOS m: Explain how the legal environment affects the valuation of closely held companies.

 

 

Edward Cloever, CFA, is reviewing a colleague’s first draft of a research report on how the legal environment affects the valuation of closely held companies. Two statements in the report draw Cloever’s attention:

Statement 1: In situations that require a legal determination of a company’s value, market transactions provide a ready estimate for a publicly traded company, but no uniform definition exists for the value of a closely held company.

Statement 2: If two closely held companies are identical in their operations and profitability, but one is structured as a corporation and the other is structured as a partnership, the rational investor should be indifferent between the two companies.

Should Cloever agree or disagree with these two statements?

Statement 1

Statement 2

A) Agree Disagree

B) Agree Agree

C) Disagree Disagree

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Cloever should agree with Statement 1 but disagree with Statement 2. Because their equity shares do not trade in the open market, closely held companies do not have a readily available estimate of their value. Different legal jurisdictions have their own definitions of intrinsic value, fundamental value, and fair value that can become important if litigation arises. A closely held company’s legal structure as a corporation, partnership, or proprietorship affects the rights and responsibilities of the investors, and therefore affects the value of their investments. The investor must take the difference in legal structure into account when evaluating otherwise identical firms.

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Which of the following statements regarding closely held companies is NOT correct?

A) The valuation of closely held companies is straightforward because of the relatively small number of investors.

B) Closely held companies can be formed as corporations, partnerships, or sole proprietorships.

C) The equity shares of closely held companies are not publicly traded.

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Closely held companies can be structured as one of several legal forms. The shares of closely held companies by definition are not publicly traded and are highly illiquid. Although there may be a small number of investors, the valuation of closely held companies is difficult because shares are illiquid, and there is limited information available.