BV502-WEB - The Market Derived Blockage Discount Model
Category: Business Valuation
Continuing Education: 2
Registration
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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.
No prerequisites for this course.
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.