Some valuation practitioners use a normalized risk-free rate in determining the cost of capital.  This can inflate the cost of equity by up to a couple of percentage points, which in turn depresses valuation multiples.  Is normalizing the risk-free rate a rational, reasonable practice?  In today’s guest post, Chris Mercer suggests the answer is an emphatic no. To read the full article in Mercer Capital's Fi ...

For Calculating Future Lost Profits Robert Dunn and Everett Harry published their oft cited Modeling and Discounting Future Damages in 2002. The article laid out the process for assessing future lost profits and discounting them to present value. They argued modeling future losses reduced the uncertainty related to the loss calculation and therefore reduced the risk premium to be included in the discount ra ...

Hotel Business Value QuickRead’s Technical Editor, Roberto Castro, reviews BVR’s What It’s Worth: Hotel Business Value.  There are few resources available for business valuation professionals that focus on the valuation of hotels.  The “go to” reference books have been Stephen Rushmore, MAI and Erich Baum’s Hotels & Motels: Valuations and Market Studies, a 2001 Appraisal Institute publication, and David ...

Once a petition for Chapter 11 is filed with the bankruptcy court, the company usually undertakes a strategic review of its operations, including opportunities to shed assets or even lines of businesses.  The Chapter 11 reorganization process concludes when the bankruptcy court confirms a reorganization plan which specifies a reorganization value and which reflects the agreed upon strategic direction and ca ...

Income of Partners and Owners of Pass-through Entities (Part II of II) This is the second part of a two-part article where the author discusses the methodology for assessing the lost earning capacity of a self-employed person. This article provides an overview for analyzing the lost earning capacity of the self-employed and discusses why this category of work provides unique assessment situations. In this s ...

Income of Partners and Owners of Pass-through Entities (Part I of II) This is a two-part article where the author discusses the methodology for assessing the lost earning capacity of a self-employed person. This, basically, is the same as that for a traditional wage and salary worker. Even though the methodology is the same, assessing the data for the self-employed is different. The loss calculations are no ...

Could that Opinion Survive a Daubert Challenge? (Part III of III) This is the third and final article of the series. Part I provided background for this thought exercise and identified the size of the hole the 76ers had to climb out of to make the playoffs. Part II addressed the path an expert might take to arrive at his or her opinion. This part addresses the implications of the thought exercise on valuati ...

Differences Between the Two Values Damages remedies often focus on lost profits and lost business value, with such remedies typically calculated by financial experts. There continues to be a trend in the courts to preclude experts from testifying, or to disregard them altogether because their opinion does not meet the reasonable certainty standard. Either of these outcomes can be a devastating result for th ...

The Present Value of Future Lost Profits, and the Time Value of Money Experts estimating the present value of a business’ future lost profits have much less direction from the courts than their counterparts estimating the present value of a person’s lost earning capacity. Professional literature has attempted to fill this gap providing many articles discussing the differing methods for analyzing lost profit ...

Understanding the Language of Chapter 11 Cramdown This article will examine terms of art used in a Chapter 11 cramdown. These terms go hand in hand during a contested or cramdown hearing. The court will work to assure that the bankruptcy definition of these terms is met before confirming a plan. Any expert expecting to testify at a cramdown hearing should have a working knowledge of their meaning. ...

This past summer, the firm of Pluris Valuation Advisors LLC released a detailed white paper on the valuation of life insurance. According to the authors, when valuing life insurance or life insurance-linked instruments such as split-dollar collateral assignment receivables or split-dollar promissory notes, there are only three elements of Fair Market Value. These include: Illustrations from the insurance co ...

What discount rate should you use? Economic damages in litigation must be reduced to present day dollar values to avoid over-compensating the Plaintiff for harm caused by the defendant. This article explains present value theory in simple terms and addresses different methodologies used in reducing future economic damages to a present day dollar value. ...

It’s not as simple as it seems This article explores the fact that the valuation of a simple debt instrument, such as a promissory note, can be anything but simple. It is observed that the sum of unpaid debt, as well as accrued interest, may well overstate the value of the promissory note. Also covered is whether assets tied to notes need to be valued separately. ...

Summary and Solutions Morningstar announced in September 2013  it will discontinue publishing the SBBI Valuation Yearbook, but that it will continue to publish the Ibbotson SBBI Classic Yearbook.  James Harrington, who was previously director of business valuation research in Morningstar's Financial Communications Business, provides a summary of which data is being discontinued and continued, along with a d ...

Nothing simple about interest The takeaway from current research and practice within the forensic financial analyst profession is to stay current on methodology and to conduct your analysis in such a manner that can be explained and defended. ...

Suggested benchmark analysis to assess the reasonableness of the cost of equity In the February/March 2013 issue of the Financial Valuation & Litigation Expert (FVLE), Issue 41, Jim Hitchner authored “How to ‘Rig’ a Valuation: The Discount Rate.” This is the first of a two-part FVLE series. The article provides suggested guidance to unmask the intentional “rig.” ...

Particularly When Valuing Companies with Substantial Foreign Operations, Business Valuation Analysts Know That Country-Specific Input Is Critical  David Foster at BVWire News reports that in additional to his general data update for 2013, Prof. Aswath Damodaran (NYU Stern School of Business) provides a list of country default spreads and risk premiums.  Here's the professor's assessment: ...

When Valuators Use a Weighted Average Cost of Capital (WACC) to Determine a Discount Rate, the Rate Needs to Be “Iterated.” Here’s Why. When an expert determines a discount rate for a controlling interest in a valuation using the Weighted Average Cost of Capital (WACC), that discount rate needs to be iterated. Since market values of debt and equity in a closely held company are not publicly traded and known ...

Valuators Must be More Than “Lucky Punks” How can appraisers best figure the cost of equity capital? Rand M. Curtiss argues that using standard tools including Ibbottson, Duff & Phelps, CAPM, or the Butler-Pinkerton model aren’t enough. What to use instead? Curtiss suggests starting with a look at the rate of return on mezzanine money and the rate of return on later-stage VC investments. Find out why. ...

Be Careful When Using EBITDA for the Terminal Valuation Calculation If you’re going to construct consistent valuations, use earnings instead of cash flows in your calculations. Why is it important to be consistent? Because you have to calculate a discount rate based on one or the other. Richard Claywell explains. ...