Certified Valuation Analyst (CVA) Practice Exam

According to restricted stock studies, what percentage is considered a safe discount for valuation analysts?

1. 20%

2. 25%

3. 35%

4. 50%

The correct answer is: 35%

In restricted stock studies, a discount of approximately 35% is often found to be a safe benchmark for valuation analysts when analyzing the value of stocks that cannot be sold freely on the market. This percentage reflects the illiquidity and lack of marketability associated with restricted stock, which typically hampers the ability of shareholders to sell their shares as they could with unrestricted stock. Valuation analysts utilize these studies to adjust valuations appropriately, ensuring that the stakeholders are aware of potential reductions in value due to these marketability restrictions. A discount of around 35% has emerged due to empirical evidence derived from transactions involving restricted stock, indicating that this figure balances the need for accurate valuation while compensating for the limitations placed on the stock's liquidity. This value is seen as a reliable estimate that can be used across various scenarios where restricted stocks are involved. In contrast, higher or lower percentages may not align with market data from restricted stock transactions as consistently, making 35% a more justified choice in professional valuation contexts.