“A discount rate and a guideline valuation multiple are both a measure of the cost of capital.This means the market approach and the income approach are the same thing,” Don Drysdale (Drysdale Valuation) told the attendees at the ASA/CICBV Business Valuation Conference Monday in Miami. “If you use the same measure of economic benefit and the same cost of capital, you reconcile the two approaches,” he explained.
Drysdale has developed the Comprehensive Adjusted Public Guideline (CAPG) model that helps reconcile the market approach and income approach. According to Drysdale:
- The auditors we work with on fair value engagements seem to appreciate having a mathematical reconciliation between the income and market approaches
- Using CAPG provides us an opportunity to develop a cost of capital from different sources
- If we arrive at different results using those different sources, we can analyze where the differences are and adjust as appropriate
- CAPG does not work in every situation, but it can be a powerful and useful tool
- Even though based on empirical data, the adjustments are still subjective, especially the unsystematic (company specific) risk
- Increased precision does not translate into increased accuracy.
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