Recognize and Avoid Substantial Valuation Differentials One of the critical inputs in the capital asset pricing model (CAPM) is beta. In practice, there are two typical ways beta is estimated. Making an incorrect assumption could lead to substantial valuation differentials of over 10% in many cases and can lead to valuation differentials of over 50% in some instances. In addition, our analysis indicates tha ...

Observations and Delaware Fair Value (Part II of II) This is the second of a two-part article, read Part I here, that focuses on empirical evidence supporting the size premium adjustment, observations regarding the CRSP size premium 10th decile category, liquidity issues that may account for the size premium, and certain Delaware Chancery Court decisions involving a size premium discussion. In this second p ...

Observations and Delaware Fair Value (Part I of II) This is a two-part article that focuses on empirical evidence supporting the size premium adjustment, observations regarding the CRSP size premium 10th decile category, liquidity issues that may account for the size premium, and certain Delaware Chancery Court decisions involving a size premium discussion. These are discussed since in the past few years th ...

A Discussion of Rover Pipeline, LLC v. 10.55 Acres of Land, More or Less, in Ashland County, Ohio, et al. “In God we trust. All others must bring data.” This famous saying has been attributed to various people, but it implies that when data is presented, the conclusion can be trusted. However, the Ohio District Court’s decision in Rover Pipeline, LLC v. 10.55 Acres of Land, More or Less, in Ashland County, ...

Considerations in Applying a Size Premium (Part III of III) In this third and final article, as displayed in Exhibits 1 through 4 in Part 1 of this three-part article, the size effect has been observed even when looking at recent periods starting in 1981 and 1990. If one holds that you should not apply the SP in the MCAPM and that beta should be the only measure of risk, one is supporting using the pure or ...

Measuring the Relative Performance of Small Stock vs. Large Stock and the Cost of Equity Roger Ibbotson and James Harrington discuss two different ways of measuring the relative performance of small stocks versus large stocks in this article: (i) the “small stock premium” and (ii) the “beta-adjusted size premium”. Ibbotson and Harrington demonstrate why using a non-beta-adjusted size premium within the cont ...

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. ...

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 calcul ...

Can private companies really increase their value 80-100 percent by limiting unsystematic (controllable) risks? The November/December 2013 issue of The Value Examiner featured Ken Sanginario’s article entitled, “The Valuation Business: A Strategic Road Map for Success.” In this article, Sanginario answers questions raised by skeptics to make the case that value doubling for private companies is possible. ...