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Answer: Above market rent paid to a controlling shareholder for shared office space
When valuing private companies, earnings normalization adjustments are needed to remove non-recurring, non-operating, or non-arm's length items. Option C represents a related-party transaction where above-market rent is paid to a controlling shareholder, which artificially reduces earnings and should be adjusted to market rates. Options A and B represent normal business transactions that should not be adjusted.
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Which of the following adjustments to normalize earnings are most likely needed when valuing a private company?
A
Interest expense on a long-term bank loan
B
Revenue from the annual sale of product to a third party
C
Above market rent paid to a controlling shareholder for shared office space