If a portfolio manager had to estimate the fair value of private equity funds invested in a young, privately-held start-up company, which of the following would he/she most likely identify as the level of inputs to determine this?

Question

Business

Karla Rowland

14 February, 16:24

If a portfolio manager had to estimate the fair value of private equity funds invested in a young, privately-held start-up company, which of the following would he/she most likely identify as the level of inputs to determine this?

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Answers (2)

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Alicia Vazquez · Answer 1

C

Explanation:

Level 3 inputs are those financial assets and liabilities that are difficult to value. They are not liquid. These inputs can be used to measure fair value to the extent that observable inputs cannot. To determine A fair value for these assets, we cannot use inputs or measures that are observable like market prices or models.

Beatrice Zhang · Answer 2

C. Level 3

Explanation:

Due to the fact that the asset is a young, privately held start up company, it is illiquid (which is the process whereby assets cannot be easily sold or exchange for cash without substantial loss) and thus belongs to the level 3 categorization of level of assets or inputs.

Level 3 inputs are inputs that are very difficult to value and are considered illiquid. It is very difficult to determine their fair value when compared with level 1 and level 2 assets or inputs. They are not traded frequently and readily. Level 3 inputs are usually the least preferred inputs because of their illiquidity.