The Choice of Models and Considerations When Developing a Rate for Your BV Report (Part I of II) Why all the excitement about interest rate volatility? Can’t we just look at a multi-year average and use that in our calculations? Well, we could, but considering recent and expected volatility, that might lead to some big errors. There are several reasons. In this article, the author discusses various models and the importance of the rate developed for a BV report. Why all the excitement about interest rate volatility? Can’t we just look at a multi-year average and use that in our…
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A White Paper Detailing Use of the Pluris Database to Develop a DLOM (Part II of III) In this second part, of a three-part series, Marc Vianello examines whether discounts reported in PLURIS DLOM Database are consistent with past changes in SEC Rule 144 required holding periods; How the PLURIS Restricted Stock Discounts Correlate with other reported Metrics; How to use PLURIS Database for Benchmarking; and the two challenges practitioners attempting to benchmark will encounter using the PLURIS Database. Read Part I here.
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A White Paper Detailing Use of the Pluris Database to Develop a DLOM (Part I of III) Business valuation practitioners continue to debate the merits of different databases to develop a discount for lack of marketability (DLOM). In this first- of a three-part series, Marc Vianello discusses what the Pluris DLOM database is, explores how accurately Pluris transactions are reported, and discusses how the Pluris DLOM Database has been presented to the business valuation community.
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Consideration for Closely Held Securities—DLOM Theoretical Models (Part II of II) This article summarizes the factors (and the empirical evidence) that the analyst may consider in the measurement of a discount for lack of marketability (DLOM) valuation adjustment associated with non-controlling securities of a closely held company. This security-level DLOM is different from the entity-level DLOM that is applied at the closely held company level. This second part of the article focuses on theoretical DLOM measurement models: the option pricing and DCF models.
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In Part 1, Travis W. Harms, Mercer Capital Financial Reporting Valuation Group lead, walked through the mechanics of the option pricing model (OPM) with a view to making the model more intuitive to non-specialist report users. In this post, he addresses the model from a more qualitative perspective, evaluating the model’s use and potential misuse in practical application. To read the full article in Mercer Capital’s Financial Reporting Blog, click: A Layperson’s Guide to the OPM: Everything You Always Wanted to Know About the OPM, But Were Afraid to Ask (Part 2). This article is republished from Mercer Capital’s Financial…
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Businesses Where Real Estate is Integral to Operations What is the best approach to use to value a business where real estate is indispensable to operations? In this article, Dr. Brous discusses the use of the option to abandon.
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Why The Black-Scholes Model Overvalues Conversion Options. The Black-Scholes method was the predominant model for many years, and was even endorsed by accounting rules prior to the introduction of FAS 157, even though it was never intended to be used for valuing complex securities or illiquid assets. Some have substituted lattice models or Monte Carlo simulation, making modifications or adjustment to attempt to compensate for illiquidity.
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This piece really has no new information in it, so if you’re looking for that, you can stop reading here. Instead, it’s for Anglophiles. Observers of British culture. The BBC recently posted rather prominently a piece pondering the tragedy of the human condition wistfully, as it so often does. Well, that’s not quite what the article was about. Actually, it’s rather hard to tell what the article is about! BBC begins by saying that those guys on Wall Street use algorithms and financial models—and one model in particular, it tells us in the first paragraph—”helped to blow up…
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Blame Disaster on Bad Inputs. Black-Scholes Works. The last few years have given us plenty of reasons to hate financial models. Models that promised to increase efficiency and manage risk became substitutes for common sense and justifications for greed. The real estate bubble was of course justified by them. Yet people at hedge funds and trading firms, using models to mint money, remain passionate believers. Another supporter is George Szpiro, a mathematician turned writer who recently released a book called Pricing The Future, about the history of the Black-Scholes equation, the most famous model in finance and the one that launched…