GPCM. When to add control premium?

CFA Level II Equities
#1

Hi, Regarding GPCM, when do we add the control premium?

Given the following example:

  • MV Debt: 1 100 000
  • Normalized EBITDA: 12 800 000
  • Average MVIC/EBITDA = 8
  • The company we are valuing is more risk, so we deflate the multiple by 20%
  • Adjusted multiple: 8 x (-0.2) = 6.4
  • Vo = 6.4 x 12 800 000 = 81 920 000
  • Ve = 81 920 000 - 1 100 000 = 80 820 000
  1. Lets assume that the transaction I was comparing with was for a non controlling interest and I was taking a controlling interest. And the Control Premium is 10%. Would I then simply add 10% to the equity part at the end of my calculation?
  • Ve = 80 820 000 x 1.10 = 88 902 000
  • Vo = 88 902 000 + 1 100 000 = 90 002 000
  1. If I was comparing with a company that was acquired for a controlling interest and I was looking at it from a minority shareholder would I then deduct the control premium at the end? Control Premium is 10%.
  • Ve = 80 820 000 x 0.90 = 72 738 000
  • Vo = 72 738 000 + 1 100 000 = 73 838 000

Is this the correct way of doing it?

#2

what was the answer to this example?

from my experience in Topic Tests, the control premium is simply added/subtracted to the MVIC/EBITDA multiple under GCM.

Under GTM however, control premium usually is already included in the stated MVIC/EBITDA.

#3

For comparable method, you will need to add the premium. For the transaction method, you dont need to add any premium

#4

confirm.

#5

Thanks for the reply guys. So is it correct to add it in the end which I did?

#6

Would it be advisable to skip the private co. valuation chapter, by any chance?

#7

where did you get that example? if you come up with the numbers yourself, well, from my experience in Topic Tests, the control premium of 10% is added to the multiple of MVIC/EBITDA.

Therefore, in your case, the MVIC/EBITDA multiple is 8 x 0.8 (where is this 20% discount coming from) x 1.1 or 7.04

and then you find MVIC

and then you deduct market value of debt from MVIC to find market value of equity

with normalized ebitda at 12,800,000 and a multiple of 7.04, MVIC is 90,112,000

and your example suggests that market value of debt is 1,100,000

so market value of equity is 89,012,000

#8

A lot of questions in the topic tests are on that chapter. Not advisable to skip, specially when Equity could be up to 25% of the exam.

#9

shouldn’t you use discount for lack of control when calculating the value for non controlling interest?