Adjusting Tech Company Financial Statements When Applying the Value Driver Formula
This article follows the authors' article in Business Valuation Review (November 2020) that explored typical errors when capitalizing cash flows in the terminal period of the Discounted Cash Flow Method. Since investments related to intangible assets are often expensed immediately through the income statement under generally accepted accounting principles, the article demonstrated that without significant adjustment, the value driver formula would likely overstate the net reinvestment into fixed assets and working capital when calculating the ...
Typical Way to Estimate Long-Term Growth Is ‘Flat Wrong,’ Says Grabowski
New research calls into question the common practice of using long-term real GDP growth plus expected inflation in terminal values.
Navigation Through the Maze in Complex Debt Instruments Valuation
Global convertible security issuance has surged in the wake of the COVID-19 outbreak as companies rush to raise cash to see them through the economic impact. This has resulted in an increase in demand for fair valuation requirement for convertible instruments. However, determination of fair value of convertible instruments can be a challenging task. Multiple provisions and attributes of the underlying security need to be considered and modeled. Join Mark Zyla, Rajesh C. Khairajani, and ...
Providing a Framework for Testing the Reasonableness of Terminal Period Cash Flow Investments
Whether using the traditional Gordon Growth formula or the value driver formula, it is common for a valuer to neglect testing the reasonableness of the capitalized free cash flow used in determining the terminal value and, therefore, derive a terminal value that is incorrect. This is troubling considering how important the terminal value is when concluding an equity value; the terminal value most often accounts for a majority of the concluded enterprise value when applying ...
Can you simply reduce the value of all private companies in the UK? Scottish Mortgage and IPEV say yes.
Investment trust Scottish Mortgage, managed by Baillie Gifford, provided a simple solution in April by cutting the value of private companies in its portfolio to recognise the fact that private-company valuations are not insulated from public markets.
Adjusting the Gordon growth model for cross-border valuations
A new research study—‘International Valuation: A Proposed Method Using the Constant Perpetual Growth Model,’ by Thomas J. O’Brien (University of Connecticut—Department of Finance)—attempts to reduce valuation mistakes introduced by cross-border foreign exchange and cash-flow risks.
Global BV News: Proposed international valuation method using Gordon model
With the valuation of a going concern in mind, a newly proposed international valuation method uses the constant perpetual expected growth model (Gordon growth model).
BVU News and Trends April 2020
A monthly roundup of key developments of interest to business valuation experts.
New paper offers improvement to the Gordon growth model
“Capitalization 2.0—Terminal Value Under Changing Capital Structure” is a new paper by Mike Adhikari (Business ValueXpress Software), a valuation and M&A advisor.
BVU News and Trends November 2019
A monthly roundup of key developments of interest to business valuation experts.
Avoid this inconsistency with the terminal value
Terminal value calculations use a perpetuity model that, when using Gordon growth, assumes cash flows occur at the end of each year.
BVU News and Trends September 2019
A monthly roundup of key developments of interest to business valuation experts.
Free download of an improvement to the Gordon growth model
One of the benefits of attending BV conferences in person is that you can also pick up some interesting things outside the formal sessions, such as during networking events, in the exhibit hall, or in the local watering hole after a long day.
In Gatekeeper Role, Court Trains Attention on Expert Methodology, Not Conclusions
In ESOP case pivoting on valuation, court denies parties’ Daubert challenges; court notes “gatekeeping” means focusing “on principles and methodology, not the conclusions that [the experts] generate”; parties’ objections are mostly quarrels with opposing expert’s conclusions, court finds.
Acosta v. Wilmington Trust, N.A. (I) (Graphite)
In ESOP case pivoting on valuation, court denies parties’ Daubert challenges; court notes “gatekeeping” means focusing “on principles and methodology, not the conclusions that [the experts] generate”; parties’ objections are mostly quarrels with opposing expert’s conclusions, court finds.
DFC Global Corp. v. Muirfield Value Partners, L.P. (II)
State Supreme Court declines to create presumption for appraisal actions that deal price is best indicator of value when merger was arm’s-length transaction, but court finds Chancery’s valuation approach lacked support in record and requires revaluation.
High Court Finds Chancery’s Weighting of Values Unexplained and Inexplicable
State Supreme Court declines to create presumption for appraisal actions that deal price is best indicator of value when merger was arm’s-length transaction, but court finds Chancery’s valuation approach lacked support in record and requires revaluation.
Control Premium Not Needed for DCF Analysis Using Gordon Growth Model
One of the issues was whether the board’s financial advisor, Credit Suisse First Boston (First Boston), correctly excluded a control premium in its assessment of the company’s value and, thus, whether the board failed to reasonably consider the value of all relevant alternatives.
In re Toys “R” Us, Inc., Shareholder Litigation
One of the issues was whether the board’s financial advisor, Credit Suisse First Boston (First Boston), correctly excluded a control premium in its assessment of the company’s value, and, thus, whether the board failed to reasonably consider the value of ...
Valuation Report - Seminole Manufacturing Co.
This case involved the valuation of decedent's approximately 20% of the stock of Seminole Manufacturing Co.
Computing terminal value
In reviewing the Cost of Capital book, page 16, we noted Dr. Pratt's comments about the error in treating EBITDA as free cash flow. We also noted that Dr. Pratt utilizes net cash flow in his discussion of the Gordon Growth Model and the Two-Stage Model shown on pages 25 to 29.
Mid-year discounts redux
In "Mid-year discounts," p. 5 of February 2001 BVU, you said, "its proper to use the Gordon Growth Model for the terminal value and then discount that terminal value by N years, not N-0.5 ...
Mid-year discounts
Duvall again correctly demonstrates that, if you use mid-year discounting, it's proper to use the Gordon Growth Model for the terminal value and then discount that terminal value by N years, not N - 0.5 years years.