Certified Valuation Analyst (CVA) Practice Exam

What is the primary factor in determining the magnitude of a discount for lack of control (DLOC)?

1. The historical performance of the company

2. Market demand for the company’s shares

3. The degree of control the interest holder possesses

4. The size of the ownership interest

The correct answer is: The degree of control the interest holder possesses

The primary factor in determining the magnitude of a discount for lack of control (DLOC) is the degree of control the interest holder possesses. This discount is applied to minority interests in a company, reflecting the reduced ability of that interest holder to influence company decisions, operations, or strategy. A significant aspect of valuation is that control equates to power in decision-making, including the ability to affect the future cash flows of the entity. When an ownership interest lacks control, its value is diminished because the holder cannot unilaterally make decisions that could enhance that value, such as initiating key strategic shifts or managing dividends. Therefore, a greater lack of control leads to a greater DLOC, as the potential for economic benefit from the ownership is reduced. In contrast, while historical performance and market demand for shares can influence overall valuation and price appreciation, they are not the main determinants of the control discount itself. Similarly, the size of the ownership interest is also relevant but not as critical as the control aspect; larger ownership stakes may afford greater control and consequently a lower DLOC, but the controlling power remains the primary consideration when assessing DLOC.