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Should the Market Approach be Excluded

When Guideline Companies are Not Very Good? When given a choice, do you prefer to minimize errors of commission or omission? The answer will likely influence your view as to whether the market approach should be used when valuing a company with guideline companies that are not very good. Someone who seeks to minimize errors of commission will likely exclude the market approach due to the difficulties in exe ...

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Application of Scenario Analysis for Computing Discount Rates

In Related-Party Cost Sharing Arrangements (Part II of II) This two-part paper demonstrates how the discount rate associated with the investment in intangibles developed under a cost sharing arrangement can be calculated using an analytical framework that explicitly considers variability of outcomes in profitability of the intangibles to be developed. Such framework is the probability-weighted scenario anal ...

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Application of Scenario Analysis for Computing Discount Rates

In Related-Party Cost Sharing Arrangements (Part I of II) This two-part paper demonstrates how the discount rate associated with the investment in intangibles developed under a cost sharing arrangement can be calculated using an analytical framework that explicitly considers variability of outcomes in profitability of the intangibles to be developed. Such framework is the probability-weighted scenario analy ...

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Estimating Nonprofit

Asset Values (Part II of III) This is the second of a three-part article that focuses on valuing nonprofit corporation assets. Valuation analysts are commonly engaged to provide fair market value guidance related to nonprofit business transactions. Nonprofit businesses are often involved in arms-length transactions. Common transactions include royalty payments for the use of intellectual property, royalty r ...

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Issues in Estimating

The Cost of Equity Capital (Part II of II) This is the second of a two-part series article focused on issues that arise estimating the cost of equity capital. In most forensic-related valuation analyses, one procedure that affects most valuations is the measurement of the present value discount rate. This discount rate analysis may affect the forensic-related valuation of private companies, business ownersh ...

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Issues in Estimating

The Cost of Equity Capital (Part I of II) This is the first of a two-part series article focused on issues that arise estimating the cost of equity capital. In most forensic-related valuation analyses, one procedure that affects most valuations is the measurement of the present value discount rate. This discount rate analysis may affect the forensic-related valuation of private companies, business ownership ...

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Terminal Values in DCFs

And Runaway Valuations In a discounted cash flow analysis, a large portion of a firm’s value is typically attributed to the terminal value, i.e., the value beyond the projection period. Valuation presentations often show or discuss what happens to the firm’s value if the perpetuity growth rate (PGR) is changed. In this sensitivity analysis, it is common to see wild swings in valuations because the terminal ...

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Terminal Value

The Problem with Exit Multiples Most of an Income Approach-based valuation is frequently in the terminal value. Thus, an Income Approach-based valuation that relies on an exit multiple to arrive at a terminal value is essentially a Market Approach-based valuation in disguise. Many practitioners do not use an exit multiple to arrive at a terminal value for this reason. Nevertheless, numerous practitioners pr ...

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Overview of Fair Value Considerations in Business Combinations

Bargain Purchase Transactions This article summarizes the fair value measurement guidance and financial accounting considerations in business combinations—and specifically, in bargain purchase transactions. This discussion also describes the principles of acquisition accounting as they relate to fair value measurement. And, this discussion describes many of the valuation analyst considerations regarding the ...

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The Real Estate Paradox

When Values Collide—Redux Valuing a business that owns real estate presents the business appraiser with a number of conundrums. In this article, the author discusses the concept of a fair investment return and how that may impact the value of the business being sold with the real estate. ...

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Case Law Update

Highlighting Recent Delaware Court Cases In this Case Law Update, three recent Delaware Court cases are reviewed. Two cases focus on whether the deal value is fair value and the third focuses on matters discovered following approval of a merger and who has standing to sue and what remedy, if any, is available to the disgruntled plaintiffs. The first two cases also delve into the role of experts, inputs that ...

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The Impact of the Tax Cuts and Jobs Act

On Business Valuations The Tax Cuts and Jobs Act (TCJA) changes many aspects of how business analysts perform valuations. Upon passing of the TCJA, Jim Hitchner moved quickly to gather and disseminate information about the TCJA and its effect on business valuation. He has written two comprehensive articles in Issues 72 and 73 of Financial Valuation and Litigation Expert. The information in this article summ ...

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In re Appraisal of DFC Global

A Study of the Experts’ Inputs and Court Opinion How does a court go about deciding a valuation case when two experts oppose each other? The author examines the DFC Global Corporation decision to see what that reveals and how that may impact an expert’s future engagement. The author finds three takeaways for readers. ...

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Practical Advice on Rebutting and/or Defending a Valuation Report

While valuation may generally be part art and part science, rebutting and/or defending a valuation introduces additional types of art and science. The stakes are often higher because interested parties are affected by the contested valuation’s outcome, and the narrative can become more nuanced due to conflicting views on a variety of issues. This article endeavors to cut through the clutter and provide prac ...

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The Economic Balance Sheet

and its Application to Enterprise Valuation The value of a firm must equal the value of the claims on its assets. In practice, this is generally expressed as the value FIRM = value DEBT + value EQUITY. Similarly, in a balance sheet prepared in accordance with generally accepted accounting principles (GAAP), assets = liabilities and equity. By comparison, an economic balance sheet is constructed using market ...

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Is Cash Always King?

When it comes to money, “enough” is the hardest word to define in the English language.  The challenge of defining “enough” extends to corporate managers deciding what cash balance is appropriate.  Travis Harms, lead of Mercer Capital’s Financial Reporting Valuation Group, takes us through the data offering helpful tips. To read the full article in Mercer Capital's Financial Reporting Blog, click: Is Cash A ...

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A Market Participant Perspective on the Size Premium

The magnitude of the equity risk premium, or required return in excess of the risk-free rate, is a perennial question for valuation specialists.  Travis Harms, Mercer Capital’s Financial Reporting Valuation Group lead, explains that the aggregate equity premium is typically broken into two pieces: 1) a market risk premium, and 2) a size premium. To read the full article in Mercer Capital's Financial Reporti ...

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Capital Structure in 30 Minutes

Capital structure decisions have long-term consequences for shareholders.  The purpose of this whitepaper is to equip directors and shareholders to contribute to capital structure decisions that promote the financial health and sustainability of the company. To read the full article in Mercer Capital's Financial Reporting Blog, click: Capital Structure in 30 Minutes. This article is republished from Mercer ...

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Dell “Loses” the Appraisal Battle but “Wins” Overall

Dell Inc. engaged in a management buyout (“MBO”) in October 2013 that effectively took the Company private, leaving Michael Dell in control (75% of its stock) with a financial sponsor (25% of its stock).  This week, Vice Chancellor J. Travis Laster of the Delaware Court of Chancery filed an opinion in In Re: Appraisal of Dell Inc. determining the fair value of the dissenters’ shares.  This post looks to see ...

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Discount Rates in a Purchase Price Allocation

Understanding the nature and risk of expected cash flow This discussion summarizes the interrelatedness of the weighted average cost of capital and the weighted average return on assets within the context of a purchase price allocation for financial reporting purposes. Failure to understand this fundamental relationship can lead to inaccurate estimates of value for the acquired assets and, therefore, inaccu ...

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