Certified Valuation Analyst (CVA) Practice Exam

What is the primary aim of applying marketability discounts in valuations?

1. To increase the overall asset appreciation

2. To reflect the diminished value of less liquid assets

3. To adjust for economic downturns

4. To decrease profitability forecasts

The correct answer is: To reflect the diminished value of less liquid assets

The primary aim of applying marketability discounts in valuations is to reflect the diminished value of less liquid assets. When assets are not easily tradable or have restrictions on their sale, investors expect a reduced selling price compared to more liquid assets. This is due to the higher risk and longer time frame associated with liquidating such assets, which directly impacts their desirability and, consequently, their market value. Marketability discounts quantify this risk and the potential for loss, ensuring that the valuation accurately represents the economic realities faced by investors. This approach acknowledges that buyers typically require a higher potential return for purchasing assets that are difficult to convert into cash, leading to a lower perceived value. Enforcing this concept is critical for ensuring that valuations are realistic and reflect the true nature of the asset’s liquidity.