Valuing Convertible Bonds: A New Approach
A recent paper by Finnerty expresses the value of a convertible bond as the value of the straight bond component plus the value of the option to exchange the bond component for a specified number of conversion shares and develops a closed-form convertible bond valuation model. This article illustrates how to apply the model to value nonredeemable convertible bonds and callable convertible bonds. The article also compares model and market prices for a sample of ...
A Note on Estimating Constant Growth Terminal Values With Inflation
In path-breaking articles, Bradley and Jarrell develop an analysis that properly accounts for inflation in the context of constant growth valuation models. They show that many traditional applications of the constant growth model err by failing to properly account for the impact of inflation on the existing capital stock. Despite the publication of the Bradley and Jarrell papers, many leading valuation texts, including Damodaran and Koller, Goedhart, and Wessels, still employ variations of the traditional ...
Avoiding Value Double-Count in Companies With Cross-Holdings
Have you unwittingly double-counted value in circumstances where there are cross-holdings? When undertaking a valuation, we sometimes come across companies within an organization structure that have cross-holdings in each other. In this article, we explore the valuation of such companies (the “cross-holdings companies”), including the valuation of the pro-rata common equity ownership interests held by individuals or entities above the cross-holdings companies. After arriving at the en bloc value of the common equity of the ...
Chancery’s fusion valuation triggers remand and some words of wisdom by Del. Supreme Court
The Delaware Supreme Court recently overturned a 2016 ruling by the Delaware Court of Chancery that arrived at fair value by weighting the results of three valuation techniques equally. The high court's Chief Justice Strine, who once headed the Chancery, found this approach was problematic and used the decision to provide valuation advice to his successor, Chancellor Bouchard, who had overseen the appraisal proceeding.
Valuing a Business With BIZCOMPS: Considerations, Tips, and Advanced Methods
When methodology meets the data, things get messy. No matter how good the database is, you’ll often need to exclude some transactions and adjust others for aspects such as sellers financing. You may also need to consider the impact of region or the age of the comparables—and all that is before trying to apply them to a methodology. Join Toby Tatum for this ultrapractical session that takes some of the transaction methods' most ambiguous questions ...
The Power of PWERM
Make your reservation for this case study-focused session starring the probability-weighted expected return method (PWERM). Using the backdrop of a clinical stage biotech company, you’ll observe the differences and similarities between the PWERM and the option pricing method. Join leading expert Annika Reinemann, who will lead a discussion of PWERM when challenged with several potential solutions. Whether you’re performing calculations with weighted average discount rates, underfunded cash flows, or the inclusion of future rounds, this ...
Regression Analysis: Fundamentals for Appraisers
Who doesn’t love a “power tool"? Join William Kennedy for an introduction (or reintroduction) to the analytical tools of regression analysis. Get a blueprint for what areas regression analysis can enhance and support the work performed on a valuation engagement and start with a solid foundation of the concepts and mathematical principles that form the basis of regression. Build on that framework with demonstrative examples that showcase the versatility and practicality of regression analysis use ...
Monte Carlo 101: Start Modeling in Excel
Valuation analysis often relies on imprecise inputs. To compensate for this uncertainty, valuation analysts sometimes employ a range of inputs to represent likely “what-if” scenarios, such as sets of “low,” “high,” and “expected” input values. While this rough approximation may be acceptable for the purposes of many analyses, the results tend to reflect bias and estimation error on the part of the valuation analyst as the input selection essentially distills a large number of possible ...
Petroleum Property Income and Market Valuation Approaches (Transactions Beware!)
Characteristics exhibited by producing liquid-rich shale formations often cause inaccurate forecasts of natural gas and oil production when multistage hydraulic fracking is used for extraction. Poor cash flow estimates can be avoided by practicing due diligence when appraising petroleum property value and income. Due diligence is satisfied by comparing volumes recorded on actual royalty check stubs or monthly statements to state-reported production volumes, by relying on petroleum reserve appraisals instead of transaction multipliers or rules ...
A Primer on Bargain Purchases and Negative Goodwill
When a change of company control occurs, such as an acquisition, a valuation of the assets acquired must be performed to be compliant with generally accepted accounting principles, as mandated by the Financial Accounting Standards Board (FASB) and addressed in Accounting Standards Codification (ASC) 805: Business Combinations. This type of exercise is commonly referred to as a purchase price allocation, since the purchase price of the subject company is allocated across all tangible and intangible ...
Comparing Three Convertible Debt Valuation Models
In this article, I (a) describe and illustrate the implementation of three convertible debt valuation models, (b) show how their values for convertible debt respond to changes in the underlying valuation parameters, (c) examine the effects of changing each of the models such that the credit spread and the probability of default are not constant but vary inversely with the stock price, and (d) measure and compare the accuracy of each model when it is ...
Tennessee dissenters claim Delaware block method is passé
The use of the Delaware block method in Tennessee recently came under attack in a case involving a closely held Nashville, Tenn.-based media company whose controlling shareholders had pursued a squeeze-out merger and later asked the trial court for a judicial appraisal of the dissenting shareholders' interest.
Flop film poses unique valuation challenge
A recent bankruptcy-related case in front of the California Court of Appeal raises important questions about how one quantifies the value of a dated piece of art, a film, for which there never was a market in the first place.
Busy time for law firm M&A means appraisal ops
It was another busy year in 2016 for law firm M&As, according to a release from Altman Weil, which tracks this activity. BVR has a new installment in its series of What It’s Worth special reports: What It's Worth: Law Firm Value. This will help you better understand the special considerations when valuing a firm of this kind.
Guidance for valuators on Washington state double dip jurisprudence
Double dipping is a tricky issue because different states have developed different approaches to it. Valuators specializing in divorce issues must know the controlling case law in the state in which they practice. A recent decision by the Washington state Court of Appeals clarifies its state's analytical framework in a case featuring a successful management consulting business the husband had set up and grown during the marriage.
Chancery relies on income approach to determine fair value in problematic bank merger
In a statutory appraisal action, the Delaware Court of Chancery recently found the deal price did not reflect fair value because the sales process was suboptimal. Certain other methods the parties' experts used also were inadequate to the task, the court said.
Challenges of the legal cannabis industry highlight NYSSCPA symposium
The NYSSCPA sponsored the Marijuana Symposium: Business, Tax and Legal Implications, which included a discussion on the nuances of valuing a firm in this challenging industry.
Compromised Section 1031 appraisal sinks Exelon tax strategy for fossil fuel power plant sale
U.S. Tax Court Judge David Laro frequently has cautioned experts not to give in to hiring attorneys who want to shape the appraisal. Although federal and state discovery rules offer some protection for attorney-expert communication, there is a risk of exposure and with it a risk of damage to the expert’s work product and reputation. A recent Section 1031 case, which Judge Laro handled, illustrates what happens when the communication is discovered.
Latest methodology and practices for DLOM examined
A blue-ribbon panel of experts review the primary DLOM methods and reveal new survey data on which methods valuators rely on most.
Book Review
A review of "The Economics of Business Valuation: Towards a Value Functional Approach," written by Patrick L. Anderson.
Stock-for-Stock Mergers: An Empirical Study of Fairness Determinations in Fairness Opinions
This study asks which valuation approaches and analyses are currently being used as the foundation for fairness opinions in stock-for-stock mergers involving U.S. companies. An examination of the SEC's EDGAR database for the years 2009 through 2014 identified 146 proxy statements for stock-for-stock mergers containing 290 fairness opinions and descriptions of the approaches, methods, and analyses employed. We found that most opinions employed more than one approach, and that opinion providers (primarily investment bankers) determined ...
AMERICAN SOCIETY OF APPRAISERS: Business Valuation Committee Special Topics Paper #2 Reinvestment Considerations in Terminal Value Estimates: Capital Expenditures and Depreciation Levels That Result in Appropriate Reinvestment Ratesa
When using a valuation method that incorporates a terminal period net cash flow estimate, the valuation analyst will need to estimate a stabilized level of net cash flow. Two primary components of this net cash flow estimate are normalized depreciation expense and normalized capital expenditures. This technical paper will discuss research that has focused on (1) the long-term relationship between depreciation expense and capital expenditures and (2) the variables that influence this relationship. This paper ...
AICPA Tips for Testifying Experts
Appraisers working on litigated disputes face special challenges. Several workshops at the recent AICPA conference in Nashville provided insights and survival tips that benefit both the seasoned financial expert witness and the upstart.
Flawed yardstick analysis sinks lost profits award
A drawn-out damages case in which a startup compression sportswear company sued the defendant "private label" manufacturer over an abandoned licensing deal promised to make the plaintiff rich but ultimately ended with nominal damages.
Defense expert testimony supports ESOP valuation and fairness opinions
A recent ESOP decision involving allegations of breach of fiduciary duty and engaging in a prohibited transaction turned on whether the ESOP trustee’s financial advisor had performed proper due diligence and issued defensible fairness and valuation analyses.