Business Valuation Update
- How to Review a Report’s Valuation Methodology
- Ideas for Solving Two Problems in the BV Profession
- How Do Your Firm’s Benefits Stack Up?
- Using Rule of Thumb Data to Uncover Cooked Books
It’s in There! So What Else Is Included in Your Estimated Cost of Capital?
In a long-running TV ad for spaghetti sauce during the 1980s, a pitchman repeatedly responds to inquiries about the product’s ingredients with the phrase: “It’s in there!” This response might also apply to your estimated cost of capital.
Trustee Liable for Inadequate ESOP Valuation Vetting
Court finds ESOP trustee liable for allowing overpayment for company shares; trustee rushed transaction and failed to scrutinize financial advisor’s valuation ignoring red flags related to projections, use of control premium, beta, rounding up of values.
Seven Models for Estimating the Cost of Equity in a Global Setting: The Pros and Cons
What is a good method for developing the equity component of international cost of capital using the capital asset pricing model (CAPM)? Jim Harrington, director at Duff & Phelps (U.S.) and co-author of the 2015 International Valuation Handbook – Guide to Cost of Capital, explains that you can use a number of models to estimate the cost of equity capital in a global environment, but there is no consensus among academics and practitioners as to the “best” model to use.
Valuer’s Q&A Corner—Richard Stewart
Q: Can the distributor method be used to value the primary asset of the business? What if there is no highly comparable market data? What do you do with contributory asset charges and attrition and life?
Economic Obsolescence: An Adjustment That Is Often Overlooked
When we perform a business valuation, the valuer is constantly faced with addressing the highest and best use of a property, as well as different premises of value that can impact the conclusions. This article discusses an issue that arises regularly but is not necessarily addressed by the valuation analyst, namely economic obsolescence.
What to Do About Applying Size Premia in Australia
The size premium is an important valuation issue for two reasons: (1) it is difficult to estimate; and (2) its inclusion in deriving a cost of capital can have a material effect on the outcome of a valuation assignment. This article provides an overview of the current status of the size effect and size premia in Australia, examples of cases from Australian courts and tribunals in which size premia have been considered, and the issues and challenges faced in estimating size premia within the Australian market.
Now You Know What Is Happening in the Infrastructure Debt Market
We recently valued an unsecured debt instrument issued by a large European infrastructure asset owner on behalf of a number of Australian superannuation funds. As infrastructure instruments (both debt and equity) are an emerging asset class for a range of investors, we thought it would be useful to share some of our insights on recent trends and issues from an investment perspective.
Indefinite Is Not Infinite—Solving a Dichotomy in Trademark Valuation
The valuation of an intangible asset is based on its useful life. For trademarks, appraisers regularly opt for an indefinite life, when no obvious factors exist that would limit the future economic life of the trademark. Almost all brands are however finite, and assuming indefiniteness can have two serious effects: one on value and one on accounting. The following article discusses such effects and suggests some guidelines and tools for how to analyse the life cycle of a brand and how to estimate its remaining useful life (RUL).
Asset Impairments: Issues, Challenges, and Guidance
As reporting season nears, companies will be required to assess the value of their assets held on the balance sheet and potentially record impairments against such assets. This can occur for a number of reasons but is typically due to adverse market conditions or a change in the market’s perception of a particular industry. Businesses continue to face difficulty identifying whether these changes mean that an impairment should be recognised and how to appropriately test for such impairments. Whilst Australian Accounting Standards Board (AASB) 136 sets out the indicators to consider when assessing whether an asset may be impaired, with the aim of ensuring that a company’s assets are carried at no more than their recoverable amount, the actual application is more problematic.
15 Tips for Valuing Intellectual Property Using the Multiperiod Excess Earnings Method
Overview. Valuing intellectual property and intangible assets is often a highly technical task. Valuation experts frequently use forms of discounted cash flow (DCF), and more specifically the multiperiod excess earnings method (MEEM), to value many intangible assets such as patents, customer relationships, commercial contracts, brands, franchise agreements, and licences.
DLOMs in Fair Value Cases: Lack of Marketability Does Not Cause Private Company Discounts
Are private companies worth less than public companies solely because they are not publicly traded or because of other identifiable factors (some of which would apply to various public companies as well)? A school of thought consisting of experienced and thoughtful experts believes they are. U.S. valuers Shannon Pratt and Roger Grabowski set forth this view ...
Drawing a clear distinction between income and market approaches and methodology
The point of this column is to advocate that income approach methods be distinguished clearly from market approach valuation methods. The valuation profession has (somewhat arbitrarily) classified ...
Discount rates based on CAPM don't always lead to minority value
The following quote from the fourth edition of Valuing a Business , contained at page 161 in the chapter titled "The Income Approach: Discounted Future Income Method," apparently has been misconstrue ...
Building better betas is Ibbotson's answer to beta controversy
Several recent research studies have provided significant support for two interesting hypotheses regarding betas: The lag effect: For all but the largest companies, the prices of individu ...
2002 in review: Tax Court decisions set new precedents; M&A market down
Topping the list of business valuation controversies in 2002 and continuing into 2003 was the issue of S corporation versus C corporation valuation. Three cases disallow tax-affecting ...
Institute of Business Appraisers 20th anniversary conference open with IRS attorney; closes with estate planning attorney
n LITIGATING ISSUES IN THE FAMILY LIMITED PARTNERSHIP ARENA Melanie Urban, Esq. Internal Revenue Service Houston, TX Ms. Urban opened with a declaration that there are two things that the IR ...
Lack of marketability discounts suffer more controversial attacks
The apparently well-meaning Drs. John Kania and Mukesh Bajaj are at it again, espousing discounts for lack of marketability for stocks of closely held companies that are a fraction of those encountered in the real world.
Computing terminal value
In reviewing the Cost of Capital book, page 16, we noted Dr. Pratt's comments about the error in treating EBITDA as free cash flow. We also noted that Dr. Pratt utilizes net cash flow in his discussion of the Gordon Growth Model and the Two-Stage Model shown on pages 25 to 29.
Cost of private equity exceeds cost of public debt
I was curious to know if any contributors to BVU over the years have addressed the situation where, in arriving at a WACC for a private company with public debt, the equity appears to have ...
Schilt Cap Rate Method
An opposing expert in a case says Shannon "endorses" the Schilt capitalization rate method from the 6/92 Business Valuation Review . I find no mention of the method in Valuing a Business ...
Ibbotson relaunches its Cost of Capital Workshop in 2003
The 2003 Cost of Capital Workshop took place on June 20, 2003, at the University of Chicago's Gleacher Center.
New studies quantifying size premiums offer strong cost of capital support
Roger Grabowski is a partner and national director of Price Waterhouse LLP Valuation Services Group. David King is a manager with Price Waterhouse LLP in their Chicago office. This repor ...
FASB releases report on business combinations issues and presents concepts for present value measures
At its August 21, 1996 meeting, the Financial Accounting Standards Board (FASB) decided to add to its technical agenda a project on accounting for business combinations. The objective of the project ...
Ibbotson relaunches its Cost of Capital Workshop in 2003 (part 2 of 2)
The 2003 Cost of Capital Workshop took place on June 20, 2003, at the University of Chicago’s Gleacher Center.
Acquirers Anonymous: Damodaran’s Seven Steps To Sober Valuations
Is the current M&A market in need of an intervention? With Private Equity funds (and their executives) reporting billions of dollars of income and “mega-deals” making the daily news, at least one independent (and respected) authority is calling for a sob ...