Question

Question 1
Rank from the highest to lowest the liquidity discount you would apply if you, as a business appraiser, had been asked to value the following businesses: (a) a local, profitable hardware store; (b) a money-losing laundry; (c) a large privately owned firm with significant excess cash balances and other liquid short-term investments; and (d) a pool-cleaning service whose primary tangible assets consist of a two-year-old truck and miscellaneous equipment. Explain and justify your rankings in detail.

Question 2
What is an acquisition vehicle? Explain in detail three factors that are likely to influence the choice of an acquisition vehicle. For each factor, explain in detail which acquisition vehicle would be preferred by an acquirer if the acquirer considers that factor to be of paramount importance.

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Answer 1:
Liquidity discount, also known as marketability discount, refers to the reduction in the valuation of the firm due to lack of an efficient market for such securities. Comparable companies which are listed on exchanges are valued higher since there is a ready market for trading such securities. Thus the highest liquidity discount is assigned to a company which has the most illiquid assets and it is very difficult to assess the value of the assets of the organization. In this case, the highest discount would be assigned to the money-losing laundry. This is because the laundry is currently making losses and it is...

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