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Let's Get Real About the Dividend Growth Model

The dividend growth model, sometimes called the dividend discount model or discounted cash flow model, is a commonly used tool for estimating the cost of equity capital, particularly in the context of utility rate setting and unitary appraisal. Although the assumption of constant growth in perpetuity is almost never realistic, the constant growth version of the model is still commonly used in practice. However, given modern computing technology, there is no reason not to use ...

Simons v. Simons

The Nebraska Supreme Court allowed a fair value determination by the wife’s expert as the appropriate value for a divorce case and did not include any discounts that might apply in a fair market value determination. Much of the opinion dealt with the issue of a constructive trust, which the trial court determined results in a 50% ownership by the wife in the family business.

Nebraska Supreme Court Allows Fair Value Determination for Family-Owned Business and Does Not Allow Discounts

The Nebraska Supreme Court allowed a fair value determination by the wife’s expert as the appropriate value for a divorce case and did not include any discounts that might apply in a fair market value determination. Much of the opinion dealt with the issue of a constructive trust, which the trial court determined results in a 50% ownership by the wife in the family business.

In re Ascena Retail Grp., Inc. Sec. Litig.

In this securities putative class action litigation, plaintiff shareholders alleged that the defendants (Ascena) misrepresented the value of Ascena’s goodwill and trade names in order to inflate Ascena’s stock price artificially. In June 2017, Ascena announced an impairment charge to those assets of $1.3 billion “causing Ascena's already-declining share price to fall precipitously. Ascena ultimately declared Chapter 11 bankruptcy in July 2020.” The defendants moved to dismiss for failure to plead material misrepresentation or scienter or both. The court granted the motion to dismiss but allowed the plaintiffs to amend their complaint.

New Jersey U.S. District Court Dismisses Plaintiffs’ Complaint That Public Company Defendant Overvalued Its Goodwill

In this securities putative class action litigation, plaintiff shareholders alleged that the defendants (Ascena) misrepresented the value of Ascena’s goodwill and trade names in order to inflate Ascena’s stock price artificially. In June 2017, Ascena announced an impairment charge to those assets of $1.3 billion “causing Ascena's already-declining share price to fall precipitously. Ascena ultimately declared Chapter 11 bankruptcy in July 2020.” The defendants moved to dismiss for failure to plead material misrepresentation or scienter or both. The court granted the motion to dismiss but allowed the plaintiffs to amend their complaint.

Appeals court vacates going-concern valuation for firm being wound down

In an Arizona divorce case, the couple owned a business that was being phased out.

Trial Court’s Decision of Value of Business Based on a Going Concern Is Reversed and Remanded

The appeal in this case dealt with, among other issues, the trial court’s decision to adopt the husband’s expert’s value that was based on a capitalization of earnings based on expected future income. The appellate court noted that the evidence from the trial showed that the business received no revenue after the wife sold her interest to a third party, and there was no evidence that similar earnings would occur in the future. The trial court’s determination of value was vacated and remanded.

In Re Riddle

The appeal in this case dealt with, among other issues, the trial court’s decision to adopt the husband’s expert’s value that was based on a capitalization of earnings based on expected future income. The appellate court noted that the evidence from the trial showed that the business received no revenue after the wife sold her interest to a third party, and there was no evidence that similar earnings would occur in the future. The trial court’s determination of value was vacated and remanded.

New case affirms treatment of goodwill in Indiana divorces

In Indiana, enterprise goodwill is includable in the marital estate, but personal goodwill is not (see BVR’s Charting Goodwill map).

Volatility of Financial Metrics: Important Data for Contingent Consideration Valuations

This article presents the first detailed statistical analysis of the volatilities of various commonly encountered financial metrics used in contingent consideration (and earn-out) agreements. The valuation of contingent consideration using an option-based methodology and non-equity volatilities is becoming more common in business valuation. We provide clear evidence that the volatility of five financial metrics—revenue; earnings before interest, taxes, depreciation, and amortization (EBITDA); EBIT, net income, and total assets—is strongly, negatively related to firm size and ...

Dispelling the ‘hired gun’ perception of testifying experts

A question often comes up: “How can two qualified and experienced business valuation experts analyze the same company and come up with widely disparate values?”

Cain v Cain

The Nebraska District Court in this case accepted the value of the wife’s expert testimony at trial as to the value of the husband’s 50% interest in his business. Both appraisers included DLOMs in determining value, and both appraisers utilized appropriate valuation methodologies. The difference in the two valuations is a matter of the difference in professional judgment.

The Nebraska District Court’s Determination of the Value of a Husband’s Business Is Affirmed—Appraisers Used Acceptable Valuation Methodology

The Nebraska District Court in this case accepted the value of the wife’s expert testimony at trial as to the value of the husband’s 50% interest in his business. Both appraisers included DLOMs in determining value, and both appraisers utilized appropriate valuation methodologies. The difference in the two valuations is a matter of the difference in professional judgment.

Valuing Small Owner-Operated Business

Small owner-operated businesses have unique characteristics that are fundamentally different from other businesses. These differences should be taken into consideration when performing valuations. Join David Coffman for a dive into those characteristics and a detailed description on how they impact valuation procedures and conclusions. Learn about the market for small owner-operated business valuations.

Asare v. Asare

In this marital dissolution appellate case, the appellate court must resolve a number of issues related to the equitable distribution of the marital estate. On most issues, the appellate court affirmed the trial court. However, the appellate court reversed the trial court on the issue of how much passive appreciation related to an investment account was includable in the marital estate.

North Carolina Appellate Court Reverses Trial Court on Amount of Passive Appreciation in an Investment Account

In this marital dissolution appellate case, the appellate court must resolve a number of issues related to the equitable distribution of the marital estate. On most issues, the appellate court affirmed the trial court. However, the appellate court reversed the trial court on the issue of how much passive appreciation related to an investment account was includable in the marital estate.

Global BV News and Trends November 2021

Business valuation news from a global perspective.

SL EC, LLC v. Ashley Energy, LLC

This case concerned the purchase of a historic steam plant in downtown St. Louis. The claims included breach of contract, fraudulent conveyance, and tortious interference, among others. This particular case dealt with a motion in limine to exclude rebuttal testimony from the expert for the counterclaim defendants regarding damages put forth by the counterclaim plaintiffs. The court denied the motion.

Court Denies Motion to Exclude Rebuttal Testimony of Damages

This case concerned the purchase of a historic steam plant in downtown St. Louis. The claims included breach of contract, fraudulent conveyance, and tortious interference, among others. This particular case dealt with a motion in limine to exclude rebuttal testimony from the expert for the counterclaim defendants regarding damages put forth by the counterclaim plaintiffs. The court denied the motion.

Global BV News: Market risk premium reverts in Germany

Recent analysis on the German market suggests that the perceived risk of equity investing has dropped back to its precrisis levels, according to Alvarez & Marsal, which does a regular analysis of pricing dynamics in Germany.

Global BV News: Multiples in China lower than year-end 2020

As of Aug. 31, 2021, earnings multiples (price to LTM earnings) for Chinese companies were lower overall than those at the end of 2020, with an average of 30.8x compared to 40.3x for year-end 2020, according to “China Transactions Insights—Fall 2021” from Duff & Phelps (a Kroll business).

Recap of recent BV cases of note

A number of recent cases have emerged that contain various valuation issues.

Business Combinations and Fair Value for Financial Reporting

Are you confused by business combinations? Join William Kennedy for this engaging session covering GAAP fair value standards and their application in business combinations. Hear a discussion of the nuances of the GAAP fair value standard and history of how it was developed as part of the GAAP-IFRS convergence project. Also learn how the valuation approaches and methods used in fair value assessment differ from valuation approaches used in a fair market value appraisal.

Comparing Growth Rates Used in Discounted Cash Flow Valuations

Estimating growth in net cash flows is one of the key components in applying the discounted cash flow (DCF) method in valuing any company, reporting unit, or other business unit. This paper explains the underlying assumptions of the DCF method and demonstrates how to compare the most commonly used basis for estimating net cash flows (sometimes referred to as free cash flows), expected organic growth, to historic estimates of growth of the subject company and ...

Island Light & Power Co. v. Sara Golvinveaux McGinnes 2011 Trust

In this shareholder dissent suit, the one-third shareholder of Island Light & Power Co. (aka BIPCO) dissented to a forced sale of the assets of BIPCO resulting in a liquidation of BIPCO and of the shareholder Trust’s stock. In a resulting bench trial, the court rejected the fair value determinations of the experts for both parties and adopted its own methodology (as is allowed by Rhode Island courts, including its Supreme Court) to determine the fair value of the one-third interest held by the Trust.

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