Cost of Capital in Litigation: Applications and Examples

September 2010 978-0-470-88094-4 Hardcover (301 pages)

Roger Grabowski, Shannon Pratt

John Wiley & Sons, Inc.

Cost of Capital in Litigation addresses cost of capital issues in litigation and discusses major decisions, highlighting how to avoid errors that have often been made by experts. The book helps the attorney and valuation expert understand the decisions within the context of the theory of cost of capital and includes a chapter on cross-examining experts on cost of capital issues. Throughout, there are citation to relevant material and cross-reference to Cost of Capital: Applications and Examples, Fourth Edition.
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CHAPTER 1: Cost of Capital Basics.


Components of a Capital Structure.

Characteristics of Cost of Capital.

Cost of Capital Equals the Discount Rate.

Net Cash Flow.

Discount Rate Is Not the Same as Capitalization Rate.

Cost of Capital Should Reflect Risk of the Investment.

CHAPTER 2: Estimating the Cost of Equity Capital and the Overall Cost of Capital.


Estimating the Cost of Equity Capital by the Build-up Method.

Estimating the Cost of Equity Capital by the Capital Asset Pricing Model.

Other Methods for Estimating the Cost of Equity Capital.

Overall (Weighted Average) Cost of Capital.

CHAPTER 3: Other Cost of Capital Considerations.


Standard of Value.

Handling Discounts for Lack of Marketability.

How the Cost of Capital Relates to the Excess Earnings Method of Valuation.

Adjusting the Discount Rate to Alternative Economic Income Measures.

Converting from After-Tax Rates to Pretax Rates.

CHAPTER 4: Cost of Capital in Estate and Gift Tax Matters.


Acceptance and Rejection of DCF.

Evaluation of Cash Flow Forecasts.

Equity Rate versus WACC.

Build-up, CAPM, or Something Else?

Cost of Equity.

Consistency of Data.

Courts Demand Supporting Detail.

Cost of Capital for a Regulated Company.

S Corporations.


CHAPTER 5: Cost of Capital Considerations in Corporate Restructuring and Other Federal Tax Matters.


Legal Entity Valuations.

Intercompany Debt.

Worthless Stock.

Transfer Pricing Disputes.


CHAPTER 6: Cost of Capital Included in Damage Calculations.


Why Discounting Is Necessary.

Is a Risk-free Discount Rate Appropriate?

Cost of Capital Is the Appropriate Risk-Adjusted Discount Rate.

Tax Effects.

Common Errors in Discounting Lost Profits.

Exclusion of Expert Testimony.


CHAPTER 7: Cost of Capital in Intellectual Property Disputes.


Categories of Intellectual Property Disputes.

Cost of Capital Issues in Intellectual Property Disputes.

Court Guidance Regarding Discount Rate Selection.

Other Considerations.


CHAPTER 8: Cost of Capital in Bankruptcy.


Cost of Capital for Debt: Cram Down Interest Rates.

Cost of Capital for Assets.

Cost of Capital for a Business Enterprise.


CHAPTER 9: Cost of Capital in Appraisal and Fairness Cases.


Discounted Cash Flow in Delaware Law.

Capital Asset Pricing Model.

Components of Weighted Average Cost of Capital.

Build-up Method.

Additional Points.

Role of the Expert.


CHAPTER 10: Cost of Capital in Family Law Matters.


Cost of Equity Capital versus WACC.

Capital Structure: Industry versus Business.

Solving for Market Value Weight Proportions and the Cost of Equity Capital.

The Hidden Impact of Rounding.

Cost of Capital in Family Law Courts.


CHAPTER 11: Cost of Capital in Ad Valorem Taxation.


Unitary Property Cost of Capital by State.

Company Cost of Capital versus Asset Cost of Capital.

Assessed Value versus Market Value.

General Categories of Legislative Constraints That Necessitate Adjustments to the Cost of Capital.

Capital Structure.

Weighted Average Cost of Capital.

Ad Valorem Tax Adder.

Flotation Costs.

WACC versus WARA.

Cost of Capital in the Courts.


CHAPTER 12: Cost of Capital in Regulated Industries.


Overview of Regulatory Decision-making Process.

Role for Cost of Capital.

Alternative Approaches to Setting Cost of Capital.

Specific Issues by Technique.

Other Methods Being Developed.

Railroad Cost of Capital Issues.


CHAPTER 13: Questions to Ask Business Valuation Experts.


Examination Outline.

Appendix I Bibliography.

Appendix II International Glossary of Business Valuation Terms.