Certified Valuation Analyst (CVA) Practice Exam

What does forced liquidation value assume?

1. A gradual sale process over time

2. An immediate sale after court approval

3. An instant sale on the valuation date

4. A value based on future income potential

The correct answer is: An instant sale on the valuation date

Forced liquidation value refers to the valuation of an asset in a scenario where the asset must be sold under pressure or in a constrained time frame, typically resulting in a lower price than what might be achieved under normal circumstances. The key assumption with forced liquidation value is that this sale occurs immediately, without any allowance for a gradual marketing process or a wait for the optimal buyer. This kind of valuation is often relevant in bankruptcy situations or distressed asset sales where time is of the essence, and the seller must liquidate the asset quickly to obtain cash. In this context, the correct answer aligns with the definition of forced liquidation value, which presupposes that the sale occurs instantly on the valuation date, necessitating a price that reflects the urgency of the transaction rather than the potential for a higher price with more time for sale. Other choices do not encapsulate the essence of this concept. For instance, a gradual sale process or values based on future income potential imply a longer term perspective that does not apply to situations necessitating immediate liquidation.