Certified Valuation Analyst (CVA) Practice Exam

What type of premium reflects the additional value attributable to a controlling interest in a business?

1. Market premium

2. Control premium

3. Investment premium

4. Liquidity premium

The correct answer is: Control premium

The type of premium that reflects the additional value attributable to a controlling interest in a business is known as the control premium. This premium is based on the premise that owning a controlling interest in a company provides certain advantages that minority shareholders do not have, such as the ability to influence management decisions, control strategic direction, and dictate policies that can enhance the overall value of the firm. When an investor is purchasing a controlling interest, they are often willing to pay more than the proportional value of the shares they are acquiring because of the inherent benefits associated with that level of control. This additional value is what constitutes the control premium, and it is particularly relevant in valuations and negotiations during mergers and acquisitions. Other types of premiums, such as market premiums, investment premiums, or liquidity premiums, pertain to different factors unrelated to control. Market premiums relate to overall market conditions, investment premiums involve returns associated with specific investment strategies, and liquidity premiums deal with the ease of buying or selling an asset. None of these accurately capture the value added specifically from having control over a business, which underscores the significance of the control premium in valuation contexts.