Capturing value within the horizon using accounting-based valuation This article examines two alternative approaches to the Discounted Cash Flow (DCF) Method when seeking to capture the majority of total value within the horizon. A closer look is given to the Residual Enterprise Income (REI) Method as well as the Abnormal Enterprise Income Growth Method (AGR) in comparison to the DCF Method, and a determina ...

In a well-supported article by zerohedge.com, the author suggests a “fix” to the current problems with price-to-earnings (P/E) multiples.  Among the questions answered are:  Can P/Es tell us anything about stock valuations during periods of earning recessions?  Is a bear market closer than we think?  If so, when is the best time to buy?  What do today’s inflated valuations mean for long-term returns?  Why a ...

In a brief, but telling article from Inc.com, Jeremy Quittner cites statistics from the November 2013 Janus Monthly Equity Report that suggests the tech and social media industries may be heading for a burst of 1990’s proportions.  This is due largely to the outrageously enormous public debuts of companies like Facebook and most recently, Twitter.  The stratospheric valuations only become more unrealistic w ...

According to Tax Court decisions Part 1 of this article examines eight of the 16 most common mistakes made in business valuation reports according to U.S. Tax Court decisions. Business valuation textbooks, training manuals, and conference presentations may do a good job of teaching the right ways to conduct valuations. But in some respects, the most authoritative teacher of what is right and, just as import ...

The Black Scholes Model The true value of a stock option is often greater than its intrinsic value. This article takes a theoretical approach to valuation that focuses on the time value of money with the Black-Scholes Option Pricing Model. ...

Income from intellectual property continues to be an increasing contributor to economic growth.  Too often, however, the creator and financial advisor find themselves in a gray area when it comes to the changing tax laws surrounding patents and copyrights.  Proper planning and a clear understanding of the most recent developments are essential when it comes to affecting the creator’s tax liability.  In a th ...

New technologies are emerging in the market to fast, that we barely acquaint ourselves with one before two more burst onto the scene.  Not all of these advancements will impact our world or even still be around a decade from now.  The ones that do last, however, will transform the economy and our lives in significant ways.  In an extremely informative and interactive report by McKinsey & Company titled, ...

The Frontline of Fraud Risk Management Internal fraud occurs as the result of a series of weaknesses within internal control systems, which are at the top of the fraud risk management pyramid. This article defines the three essential types of internal controls, their five interrelated components, and how they can be instituted for maximum protection. ...

When is it appropriate for highway/heavy construction contractors? This article discusses the appropriateness of using the Asset-Based Approach for minority interests in companies where that approach results in higher value than the Income or Market Approach. ...

  More often than not, a company’s income statement isn’t a definitive disclosure of its revenue and expenses that investors can interpret clearly, easily and accurately.  This is largely because income and expenses, as classified under GAAP, can be difficult to define.  According to McKinsey & Company, savvy investors often have to reengineer statements to come up with figures that they’re even re ...

Everyone knows that in a merger or acquisition deal, time is not a friend.  The longer transfer negotiations drag on without an agreement, the less likely a deal is going to be signed.  This is mostly because over time, both parties are more likely to adopt adversarial positions.  When things slow down, firms begin to assume the successor isn’t making the transaction a priority and may not the right candida ...

As experts, don’t we owe loyalty to ourselves and our profession? The article draws a parallel between the qualities that are needed to obtain the Eagle Scout designation and those that are necessary to serve as an expert witness. ...

Fine art collectors and estate taxes Tax and estate planning is complex and constantly evolving. Choosing the appropriate strategy depends on the specific circumstances involved. It is critical for tax professionals, estate planning attorneys, and valuation analysts to understand the client’s precise needs and work collaboratively to achieve their stated goals. ...

A view of the use and limits of option models (Part 2 of 2) Option pricing models (OPMs) are increasingly used to estimate the discount for lack of marketability (DLOM) in the business valuation profession. Some analysts disagree about whether OPMs are applicable for estimating the DLOM. Since OPMs were originally derived to determine option prices for publicly traded securities, many analysts question the ...

In an interesting interview with the Risk & Compliance Journal, David Hoffman, forensic accountant and managing director at Acuitas, Inc. discusses the status of the lawsuits that resulted from the bank failures that occurred in the years following the economic crisis of 2008. At the close of 2013, there were 81 lawsuits involving 127 different banks. Hoffman discusses his role as a forensic investigator in ...

Beginning this year, the PCAOB is making it a priority to examine whether or not firms that offer non-audit service lines are compromising the quality and accuracy of their audit services by doing so. In yet-to-be-scheduled roundtable discussions with audit firm leaders, regulators are expected to delve into the potential implications for such consulting arrangements. According to PCAOB chairman, James Doty ...

Business valuation in divorce In this article, Brian Murray examines the risks taken by clients when valuators are hired to “get the numbers” needed to support a desired outcome in divorce proceedings. In most cases, such a preplanned agenda backfires and creates more problems in the end. ...

Is there a disconnect between client expectations and advisory services? Valuation professionals are uniquely positioned to help clients identify opportunities and third parties that can take them to a proverbial next level. Business valuation is about more than just benchmarking and deriving a defensible conclusion of value, it should entail understanding the value and interplay of governance, risk, relati ...

New private company cost of capital model delivers consistent and observable results The Implied Private Company Pricing Line (IPCPL) Cost of Capital Model seeks to eliminate pitfalls for unsystematic risk, liquidity, small stock premium, PTE taxes, and cash/leverage by utilizing real transaction, market-clearing prices between buyers and sellers of comparable small private businesses. ...

A view of the use and limits of option models (Part 1 of 2) Option pricing models (OPMs) are increasingly used to estimate the discount for lack of marketability (DLOM) in the business valuation profession. Some analysts disagree about whether OPMs are applicable for estimating the DLOM. Since OPMs were originally derived to determine option prices for publicly traded securities, many analysts question the ...