BV502-WEB - The Market Derived Blockage Discount Model

Registration

Please see the "Upcoming Classes" tab for class offerings and registration information.

Webinar Course Description

Determining  blockage discounts by the Black Scholes Option Model has been a common practice for over twenty years. Blockage is defined by the cost of buying enough put options to hedge the price of the subject shares on the valuation date. One weakness with this approach has been the holding period for the options. In most cases, this has been determined by unsupported assumptions. The Market-Derived Blockage Discount Model presents a mathematical means for determining the appropriate selling period for the subject shares in a blockage ‘‘dribble out’’ analysis. If the model assumes too many shares are sold at one time, the price impact is too great. If the dribble out period is too long, the cost of the option is too high. Additionally, the shares to be sold in the hypothetical selling period of the model will increase the volatility input needed for the model. The optimum option holding period is the one that achieves the lowest cost. 

Course Audience

Valuation analysts working in the area of valuations for estate and gift tax purposes

NASBA and Continuing Professional Education (CPE) Credit

The American Society of Appraisers is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have the final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted to the National Registry of CPE Sponsors through its website www.learningmarket.org.

CPE Credit: (2) Hours in Specialized Knowledge
Program Level: Intermediate
Delivery Method: Group-internet based courses are approved for CPE
Prerequisites: None
Advanced Preparation: None
Policies: ASA's Refund and Cancellation Policy and ASA's Complaint Resolution Policy

Instructor(s) Information

William H. Frazier , ASA | CEO | W.H. Frazier & Co., Inc.

William H. Frazier, ASA has over 40 years in valuing closely-held businesses and securities issued by such businesses. He is best known in the estate and gift tax world, having testified in several landmark cases tried in the U.S. Tax Court. He also is highly experienced in handling controversies with the IRS. Will Has written numerous articles on the subject of valuation, including Determining the Cost of Blockage by the Market-Derived Blockage Discount Model which appeared in the ASA’s Business Valuation Review. Will is the developer of the Non-marketable Investment Company Evaluation (“NICE”) Method and author of the chapter, The Cost of Capital of Private Company Interests, in the valuation textbook, The Cost of Capital. He has served on the IRS Advisory Council (IRSAC) from 2008-2011 and was a member of the Valuation Advisory Board of Trusts & Estates. Will previously served as the chairman of ASA’s Government Relations Committee and the ASA’s Tax Reform Task Force.  He also previously served on the Business Valuation Committee and board of ASA’s Education Foundation. He currently is a member of the Business Valuation Committee’s Appraisal Standards Sub-committee.

Ronak P. Shah | Director | Stout Risius Ross, LLC

Ronak P. Shah, CFA is a director in the Valuation Advisory group of the Houston office of Stout Risius Ross, LLC. Ronak co-authored the paper on the Market-Derived Blockage Discount Model.

Agenda

The following topics are covered in this course:

I. The traditional BSOPM approach to blockage

a. Also known as the "Chaffe Model"

b. Mixed success in court

II. Weaknesses of the Chaffe Model

a. Holding period has no prescribed method for determination

b. Volatility is assumed to be unaffected

III. Using Market Price/Volume Information to Determine the Holding Period

a. Historical price change of subject stock based on varying levels of volume b. Using historical data to set up parameters

i. Create price effect tables for range of days

1. Regression analysis
2. Typically, 5-15 days

IV. Recognizing the Volatility Effect of the Subject Shares on the Market

a. The sale of the subject shares will increase volatility during the hypothetical selling period (the holding periodb. The volatility effect varies based on size and length of holding period

V. The Blockage Discount is that Hypothetical Selling Strategy which is the Lowest Cost

Learning Outcomes

Upon completion of this course,students will be able to:

• Recognize the strength and weaknesses of the traditional option model method for determining blockage discounts;
• Determine objectively the optimum holding period for the option model;
• Test how the sale of the block affects volatility; and
• Analyze the relative costs of hypothetical price effect of the sale of shares with the cost of the purchasing put options.