CHAPTER 23

Cost of Capital of Family Holding Company Interests

William H. Frazier

INTRODUCTION

Family holding companies (FHCs) are closely held investment entities such as family limited partnerships (FLPs) and limited liability companies (LLCs) that hold investment assets such as stocks, bonds, and real estate.1 Occasionally, these entities may own an operating business.

In the traditional market approach to valuing equity interests in FHCs, the major objectives are to determine the appropriate discounts for lack of control and lack of marketability. These discounts, when applied to the net asset value (NAV) of the entity, provide estimates of fair market value.

The nonmarketable investment company evaluation (NICE) method is a valuation method under the income approach. It is designed especially to determine the fair market value of equity interests in family holding companies by ...

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