In business valuation, a discount for contingent liabilities is applied to account for potential future obligations that are not yet certain. Both environmental liabilities (e.g., potential costs for site remediation) and pending lawsuits represent classic examples of such contingencies. The outcome and financial impact of these events are uncertain, creating a risk that a valuator must quantify. This is often done by estimating the expected cost (probability multiplied by potential payout) and deducting it from the company's value, or by adjusting the discount rate to reflect the increased risk.

A. This is a correct example, but the answer is incomplete because pending lawsuits are also a valid and common type of contingent liability.

B. This is also a correct example, but the answer is incomplete as environmental liabilities are another significant category of contingent liabilities.

C. A controlling ownership interest is associated with a control premium, which increases value, not a discount for a liability.

1. Hitchner, J. R. (2017). Financial Valuation: Applications and Models (4th ed.). In Chapter 4, "Business Valuation Standards and Professional Responsibilities," the text discusses the requirement to consider all relevant information, including off-balance-sheet items. Contingent liabilities such as "pending or threatened litigation" and "environmental matters" are explicitly mentioned as items that must be analyzed and potentially adjusted for in the valuation process (pp. 78-79).

2. Pratt, S. P., & Grabowski, R. J. (2014). Cost of Capital: Applications and Examples (5th ed.). Chapter 11, "Company-Specific Risk," details factors that are incorporated into the cost of capital. The authors list "pending litigation that could have a material effect on the company" and "potential environmental and/or product liability claims" as key examples of company-specific risks that must be assessed, which often manifest as contingent liabilities (p. 215).

3. Damodaran, A. (2012). Investment Valuation: Tools and Techniques for Determining the Value of Any Asset (3rd ed.). In Chapter 30, "The Value of Control, Synergy, and Brand Names," Damodaran discusses valuing contingent liabilities. He states, "The most common contingent liability that firms have to deal with is the threat of a lawsuit... Another potential liability is the cost of cleaning up environmental damage." He provides a framework for valuing these liabilities by estimating the expected expense (Section: Valuing Contingent Liabilities, pp. 748-749).