For International Arbitration Proceedings This article highlights key valuation issues that are debated during arbitrations, which we have faced on numerous occasions. Some of the most important ones that come up during the quantification of economic damages in international arbitration are biases in financial projections, questions about discount rate, and some secondary concerns. Introduction Economic damages are seen as the Holy Grail of any international arbitration. The amount of compensation for financial losses is the ultimate goal of the claimant, who seeks to be compensated for the damage suffered, but that amount is also the main concern for the respondent,…
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When Estimating the Cost of Capital (Part I of III) In this paper, published in three parts with NACVA’s QuickRead, Roger Grabowski reviews the size effect, potential reasons why one observes the size effect, and correct common misconceptions and address criticisms of the Size Premia (SP). Throughout this paper, the author shows that using a pure market factor as the sole risk factor in estimating the expected return provide an incomplete estimate. For the last four decades, research has shown that adjustments to the CAPM are required. Here, Roger Grabowski addresses some of the criticism to the theoretical basis of…
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A Critique of the Ibbotson Methodology In this paper, the author argues that the Size Premium in Excess of CAPM (and other similar size premium measures) should not be used by valuation practitioners because: a) it is inconsistent with the empirical evidence; b) it is constructed using a method that is inconsistent with how practitioners estimate their CAPM cost of equity; and c) it does not properly calculate the “premium” for use in a Discounted Cash Flow (DCF) analysis. Through an illustration, the author also demonstrates the challenges one faces when correcting for the latter two issues.