During a recent webinar, it was noted that there are various models for estimating company-specific risk, such as Trugman, Black/Green, Warren Miller, and Butler/Pinkerton. Then there was a mention of the Finison-Dailey model. “What model?” “Never heard of it.” Those comments started to reverberate from the audience, so, right then and there, a search of the BVResearch Pro platform was done. Result: An article popped up from the July 2003 issue of Business Valuation Update written by—guess who—Finison and Dailey.
Their model is based on a SWOT analysis and uses a five-point scale to quantify the company-specific equity risk premium. The strength/weakness scale ranges from -2 for “critical weakness” to +2 representing “core competence.” The opportunity/threat scale ranges from -2 for “very threatening” to +2 for “very opportunistic.” While the model provides a formula to pinpoint the company-specific equity risk premium, the analyst should still use professional judgment in determining the appropriate analysis area and ratings. The formula is:
Pcs = C - (∑ (SW%,OT%) × (Rmax - Rmin)/4)
where:
Pcs = company-specific risk premium;
C = center point of premium range, determined by averaging Rmax and Rmin;
SW% = the percentage score of strengths and weaknesses;
OT% = the percentage score of opportunities and threats;
Rmax = the maximum possible premium in the range; and
Rmin = the minimum possible premium in the range.
The article, “A SWOT Model for Quantifying the Company-Specific Risk Premium,” written by E. Bryant Finison Jr. and Michael L. Dailey, is available to subscribers of Business Valuation Update or BVResearch Pro (or it can be purchased as a stand-alone article).