BVR’s Cost of Capital Professional and the Duff & Phelps Cost of Capital Navigator went head-to-head for the first time, headlining the annual two-day conference of the Virginia Society of CPAs. Bottom line: Both platforms produce similar results, but they have different attributes, as speakers pointed out during a good-natured “point-counterpoint” session.
Jim Harrington (Duff & Phelps) led off with an overview of the Navigator and demonstrated how the platform incorporates industry-level data in developing a WACC using the buildup method and CAPM. He explained that the platform’s industry data includes “pure-play” companies (those with at least 75% of their revenue coming from a single line of business), and he benchmarked a hypothetical subject company against comparable firms and examined betas (calculated in various ways) in order to estimate industry risk. With all of the multiple options for the various inputs, the platform produced over a dozen calculations of the cost of equity. No doubt about it, the Navigator has a massive amount of data, methodologies, and output.
Ron Seigneur (Seigneur Gustafson LLP CPAs), who co-chairs the advisory board for the Cost of Capital Professional, pointed out there are “no bright-line formulas” and that professional judgment needs to play a big part in estimating cost of capital. Speaking of industry data, he pointed out that the platform has two sources of industry betas: (1) Professor Aswath Damodaran (New York University Stern School of Business); and (2) Salvidio & Partners, a Rome, Italy-based firm. One of the hallmarks of the Cost of Capital Professional is flexibility, and Seigneur noted that the platform gives the user the ability to choose the time horizon for the historical data.
Jim Hitchner (Financial Valuation Advisors Inc.) presented a tale-of-the-tape comparison between the two with respect to the data used for the inputs to the buildup and modified CAPM. (Hitchner is also on the advisory board of the Cost of Capital Professional.) He used a hypothetical subject company and put the two platforms through their paces using various input options. The result was a cost of equity range of from 15% to 17% from both platforms for the buildup method and 15% to 16% for the modified CAPM, which is “not that much different,” he says.
The Cost of Capital Professional is not the mammoth system that the Navigator is, but its appeal to users may lie in its simplicity. In the audience, there were users of both platforms, so they both clearly have a place in the valuer’s toolbox. In fact, some users have both platforms and they compare the results, which is certainly a welcome option in this challenging process. As Harrington pointed out: “None of this is perfect. We’re trying to predict the future.”
The speakers did a great job and kudos also to Harold Martin (Keiter), who put together an excellent conference (now in its 20th year) that covered not only business valuation, but also forensics and litigation services. There will be extended coverage in the next issue of Business Valuation Update.
Extra: BVR is offering a custom-designed trial period for its Cost of Capital Professional. Just contact a member of BVR’s sales team either at sales@bvresources.com or 503-479-8200 (ext. 2).