Certified Valuation Analyst (CVA) Practice Exam

What must precede the application of applicable discounts in valuation?

1. Assessment of market conditions

2. Determination of preliminary/base value of the equity or enterprise

3. Approval by shareholders

4. Comparison with industry benchmarks

The correct answer is: Determination of preliminary/base value of the equity or enterprise

The correct approach to valuation requires a determination of the preliminary or base value of the equity or enterprise before any applicable discounts can be applied. This preliminary value acts as a foundational figure that reflects the potential worth of the business before any adjustments are made for factors such as marketability or control. Once the base value is established, analysts can then assess specific discounts based on the nature of the ownership interest being valued and other contextual elements. For example, discounts for lack of marketability come into play after a clear understanding of the base value has been determined, as they reflect the potential decrease in value due to factors like limited liquidity of the asset. Contextually, while assessing market conditions, seeking shareholder approval, or comparing with industry benchmarks may provide valuable insights into the broader valuation environment, they do not substitute for the necessity of establishing a precise base value. These factors may influence or refine that base value, but they do not directly precede the application of discounts. Therefore, determining the preliminary/base value is a critical step that logically comes before any further adjustments through discounts.