Angela Cook, CFA, is an expert in the valuations of private firms. She identifies opportunities and analyzes them from an investment perspective. She has been asked to train new associates on the approaches for valuing private firms. During the session, she mentions that the asset-based approach for valuing a private firm is appropriate in the following cases: Case 1: Small companies or early-stage companies with large intangible assets Case 2: Finance firms where asset and liability values can be based on market prices and factors Case 3: Natural resources companies where assets can be evaluated using comparable sales She mentions the Excess Earnings Method (EEM) as another method of valuing a private firm and presents the following data to explain its application.

Exhibit 1: Financial Information for a Private Firm

Working capital	$150,000
Fixed assets	$800,000
Normalized earnings	$100,000
Required return for working capital	5%
Required return for assets	9%
Growth rate of residual income	5%
Discount rate for intangible assets	15%

Cook says that market approach methods, which use price multiples and data from previous public and private transactions, are also useful for private firm valuations. She lists three market approach methods guideline public company method (GPCM), guideline transaction method (GTM), and the prior transaction method (PTM) and makes the following statements about them:

Statement 1: GPCM uses price multiples from the trade data of public companies viewed as reasonably comparable to the subject private company. These multiples are then adjusted to account for the differences between the subject firm and the comparable firm. Statement 2: GTM establishes a value estimate based on pricing multiples derived from the acquisition of control of entire public or private companies. Statement 3: PTM is most appropriate when valuing a majority interest. After explaining these market approaches to the associates, she asks them to value a private firm from the perspective of a strategic buyer. She presents the associates with the following data. She also asks the associates to deflate the average company multiple by 20% to account for the higher risk associated with the private firm.

Exhibit 2: Data Relevant to a Strategic Buyer

Market value of debt	$1.5 million
Normalized EBITDA	$12 million
Average public company MVIC/EBITDA multiple	5
Control premium from past transaction	20%

Cook discusses the effects of discounts and premiums based on control and marketability on private company valuations. She makes two comments regarding discount for lack of control (DLOC) and discount for lack of marketability (DLOM). Comment 1: "A DLOM cannot be used in cases when a noncontrolling interest in a private company is being valued." Comment 2: "DLOM and DLOC are typically not linked - if there is a discount for one, there is generally not a discount for the other." She then asks associates to calculate the value of total discount for a private firm that has a DLOC of 20% and a DLOM of 15%. She gets the following response from one of the associates: The total discount is the sum of DLOC and DLOM. Hence, the total discount for the company would be 35%.

Question

Is the associates response with regard to the total discount correct? If not, what is the total discount?

Question

Based on Exhibit 1, what is the value of the private firm using the EEM method?

Question

Based on Exhibit 2, what is the value of the firms equity (in millions) from a strategic buyers perspective using the GPCM method?

Question

Which case (Case 1, 2, or 3) with regard to the asset-based approach is(are) incorrect?

Question

Are the two comments regarding DLOC and DLOM correct?

Question

Which of Cook's statements regarding market approach methods is(are) incorrect?