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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Beyond the Tale of the Three Bears Terminal values deserve substantial attention for the reason that that is where (most of) the value is found. Some approaches to terminal value tend to result in higher values, whereas other approaches tend to result in lower values. This article provides some insight into the implied assumptions and relative biases of these approaches. Terminal values deserve substantial attention for the same reason Willie Sutton robbed banks—that is where (most of) the value is. Some approaches to terminal value tend to result in higher values, whereas other approaches tend to result in lower values.…
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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 prefer to use an exit multiple. The basis is straight-forward: the goal is to arrive at a value of the business at the end of the discrete projection period and a hypothetical sale at that time is likely…
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Is it the Market or the Model? Petitioners in Delaware appraisal cases must necessarily argue that fair value exceeds the deal price. In contrast, financial economists tend to view prices from a well-functioning market as “true north” when valuing a stock. Valuation models—such as a discounted cash flow (DCF) model—+can be important tools but are known to be sensitive to their numerous inputs. When such a model results in a valuation that is at odds with market prices, it is imperative to understand the disconnect: Is it the market or the model that is wrong? In this Q&A, Analysis Group…
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on Corporate Income Taxes What corporate tax rate should valuation practitioners use going forward given the current environment? Despite corporate rates being “permanent”, is that so?! How should practitioners handle temporary differences? How do we decode a financial statement? In this article, the author shares his thoughts on how valuation professionals should approach a valuation engagement in this uncertain tax environment.
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Is Not Debatable This article explains why the undiscounted terminal value as of a future date must be discounted back by (a) N – 0.5 years when the traditional perpetuity method with a mid-period convention is used, (b) N years when the traditional perpetuity method with an end-of-period convention is used, or (c) N years when an exit multiple is used.
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Once a petition for Chapter 11 is filed with the bankruptcy court, the company usually undertakes a strategic review of its operations, including opportunities to shed assets or even lines of businesses. The Chapter 11 reorganization process concludes when the bankruptcy court confirms a reorganization plan which specifies a reorganization value and which reflects the agreed upon strategic direction and capital structure of the emerging entity. Travis Harms and Sujan Rajbhandary, both of Mercer Capital’s Financial Reporting Valuation Group, share some wonderful insight on this process. To read the full article in Mercer Capital’s Financial Reporting Blog, click: Valuation Expertise…