nondiversificationandnotforilliquidity.Wecanestimatethe
illiquidity discount for Kristin Kandy, using any of the
approaches described in the preceding section. In making
these estimates, we used the following benchmarks:
- WecomputedtheSilberregressiondiscountusinga
base discountof 15% fora healthy firm with $10
million in revenues. The difference in illiquidity
discountforafirmwith$10millioninrevenuesanda
firm with $3 million in revenues in the Silber
regressionis2.17%.Addingthistothebasediscount
of 15% yields a total discount of 17.17%. - Thesyntheticbid-askspreadwascomputedusingthe
spreadregressionpresentedearlierandtheinputsfor
Kristin Kandy (revenues = $3 million, positive
earnings, cash/firm value = 6.56%, and no trading). - Tovalueilliquidityasanoption,wechosearbitrary
valuesforillustrativepurposesofanupperlimiton
theprice (at which you wouldhave sold) of 20%
abovethecurrentvalue,anindustryaveragestandard
deviationof25%,andaone-yeartradingrestriction.
The resulting option has the following parameters:
Thevalueofliquidityistheproductofthevalueof
theoption,basedontheparameterslistedabove,and
theprobabilitythatthestockpricewouldincreaseby
more than 20% over the next year.