2013 Level II Mock, question 58 afternoon session

“Smirnoff suggests that Rivera should adjust BTP’s multiples reflecting a 25% discount for additional risks, because of its small size and thin trading”

Why do we adjust the P/B multiple downwards? Doesnt that mean we are reducing the price (or increasing book value) and hence making the stock more attractive?

I know I thought the same thing. maybe we’re adjusting the price downwards and assuming the book value is the same. the discount of marketability is usually equity related, no?

Yeah, but as far as I know (and Im starting to doubt how much I know after this fricking mock), DLOM is applied to a piece of interest that an acquirer is valuing. So, if it isnt marketable then the value of interest is reduced by the DLOM percentage.

That doesnt seem consistent with this question. I would assume that book value should be reduced by 25% and thus the P/B ratio increases by 25%


Adjusting the ratio down makes sense when you think of this as moving the price down. If you increase risks you increase the discount rate and consequently the future cash flows are worth less in presentpresent