Thefirsttermisthepresentvalueofannualcashflowsduring
theholdingperiod—$0.60(60percentof$1) growingat 4
percentayearforthenextfiveyears—andthesecondtermis
thepresent valueof theterminal value ($20growing at 4
percentayearforthenextfiveyears),alldiscountedbackat
theliquidity-adjusteddiscountrateof 12 percent.Comparing
theestimated value($16.13) tothe unadjustedvalue ($20)
yields an illiquidity discount of 19.35 percent.
WhiletheQMDMmodeliswellintentioned,itfailsonthree
levels.First,thecashflowthatdoesnotgetpaidoutoverthe
nextfiveyearsis assumedto bewasted bythecontrolling
stockholders forprivate benefitsthat do not accrue to the
business.
76 Ifthisisindeedthecase,thefirmvalueshouldhavebeen
computed at $12 initially, rather than $20.
77 Second,theilliquiditydiscountcomputedinthemodelisa
consequence of both control and illiquidity. While Mercer
makesthereasonablepointthatthetwoareinterrelated,one
canveryeasilyexistwithouttheother.Inotherwords,you
canhaveacompletelyliquidinvestmentwithabsolutely no
controloverhowafirmisrun,asisoftenthecasewithstock
inalargepubliclytradedcompany.Thefactthatyoucansell
yourstockatanytimewillnotprotectyoufrommanagement
orcontrollingstockholderactionssincethepriceyousellat
will reflect management foibles. Third, for a model that
claims to quantify nonmarketability, the QMDM is
surprisinglyelusiveontheadjustmentmadetothediscount