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In the answer for past question mehran it is written there will be an adjustment for the lack of liquidity of the investment which reflects the lesser ability of ordinary shareholder to initiate a sale of erham relative to the preferred shareholder what does this mean ??
Hi,
It is saying that if we calculate a fair value of the investment an adjustment will need to be made. This adjustment is because the venture capital now have control following the issue of the preferred shares to them, and therefore we have less of an interest than we would have previously. This less of an interest means we have less say on what can be done with regards to the sale of the shares and so this needs to be reflected in the fair value. An investor would pay less given this restraint.
Try not to worry about minor technicalities as such, they’ll only confuse you and nobody is likely to have made the point in the exam.
Thanks
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