Organizational Forms, Issuer Features, and Ownership: practice question

An employee of Thistledown Robotics, a private corporation, receives 2,000 shares as part of her bonus and wants to establish what they are worth before a possible sale to a colleague. A friend of hers holds shares in an exchange-listed company and can observe a market price for them throughout the trading day. For the Thistledown shares, value is most likely established through:

1. a continuously quoted market price available from an organized exchange throughout the trading day.
2. negotiation between the buyer and seller, often supported by an independent appraisal.
3. the book value per share shown on the company's most recent audited balance sheet.

Show answer and explanation

Correct answer: B

Explanation: B is correct: shares of a private company are not traded on an exchange, so transfers are arranged privately and the price is negotiated between the parties, frequently with an independent valuation to support it. A is incorrect because a continuous exchange quote exists only for listed (public) shares, which describes the friend's situation, not the employee's. C is incorrect because book value is an accounting carrying amount; it does not measure the fair value of the shares and is not the mechanism by which prices for private shares are set.