Butler/Pinkerton update questions on comparables

BVWireIssue #66-1
March 5, 2008

The FAQ for the Butler/Pinkerton Model Total Cost of Equity and Public Company-Specific Risk Calculator™ (BPM) stays current on all user questions, thanks to constant attention and updating by co-developers Pete Butler and Keith Pinkerton.  Recently, a user asked whether he “must have” good public company comparables for using the BPM in an engagement involving a $40 million subject company (when the opposing expert had valued the same company at $90 million).  “I believe the key word is ‘must’” Butler responds, adding these points:

  1. Alternatives to quantify company-specific risk (CSR) lack any empirical data.  The BPM supplies empirical data.  So, the choice is to use the BPM with maybe ‘not-so great’ guidelines or to use the component observation method, for example, which does not have any empirical data.
  2. Any time appraisers use the income approach, we generally get our discount rate inputs (beta, equity risk premium, size premium, and industry premium) from publicly traded stock data.  We do not throw out the income approach because there are no good guideline companies.  Thus in our opinion, we should not throw out the BPM if there are no ‘good’ guideline companies.  We calculate CSR from the same publicly-traded data.

Of course, “I do want ‘good’ guidelines with the BPM,” Butler adds.  What constitutes “good” will vary from one engagement to the next.  For the complete FAQ, click here.

The authors answer more questions tomorrow:  Butler and Pinkerton will discuss their model and take questions from attendees tomorrow, March 6, 2008, during BVR’s teleconference on “Using the BPM Total Cost of Equity (TCOE) and Public Company-Specific Risk Calculator.”  To register, click here.

Please let us know if you have any comments about this article or enhancements you would like to see.