Forensic & Valuation Services Practice Aid Discount Rates, Risk, and Uncertainty in Economic Damages Calculations
|
|
- Reginald Hood
- 8 years ago
- Views:
Transcription
1 Forensic & Valuation Services Practice Aid Discount Rates, Risk, and Uncertainty in Economic Damages Calculations Page 1
2 Copyright 2013 by American Institute of Certified Public Accountants, Inc. New York, NY All rights reserved. For information about the procedure for requesting permission to make copies of any part of this work, please with your request. Otherwise, requests should be written and mailed to the Permissions Department, AICPA, 220 Leigh Farm Road, Durham, NC Page 2
3 Notice to Readers This publication is designed to provide illustrative information with respect to the subject matter covered. It does not establish standards or preferred practices. The material was prepared by the AICPA staff and volunteers and has not been considered or acted upon by AICPA senior technical committees or the AICPA board of directors and does not represent an official opinion or position of the AICPA. It is provided with the understanding that the AICPA staff and the publisher are not engaged in rendering any legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. The AICPA staff and this publisher make no representations, warranties, or guarantees about, and assume no responsibility for, the content or application of the material contained herein and expressly disclaim all liability for any damages arising out of the use of, reference to, or reliance on such material. Acknowledgements The principal authors of this practice aid are Christian Tregillis, Scott Bouchner, David Duffus, and Greg Regan. In addition, a special note of gratitude is extended to Everett Harry, Jarit Loughmiller, and Jed Greene, who assisted in drafting or reviewing sections of this practice aid. Members of the and AICPA Forensic and Litigation Services (FLS) Committee and Forensic and Valuation Services (FVS) Executive Committee also provided information and advice to the authors and AICPA staff for this practice aid. AICPA Staff Jeannette Koger Director Member Specialization & Credentialing Elaine Leggett Technical Manager FVS Section Barbara Andrews Project Manager FVS Section Page 3
4 Chapter 1 Introduction Experts evaluate the time value of money in both valuation and economic damages analyses. Courts, however, have offered little guidance with respect to acceptable methods to identify and implement an appropriate discount rate to accomplish this objective particularly in the economic damages context. Moreover, the published opinions in this area are frequently fact-specific and are not always consistent (see chapter 7, "Example Case Law," in this practice aid for a case law summary). Consequently, experts are called upon to interpret and apply the case circumstances using an appropriate methodology. fn 1 Terms in this practice aid that are in italics are defined in the glossary. This practice aid was written with an expectation that the reader has a basic understanding of the concept of the time value of money. Building on this knowledge, this practice aid presents the bases for certain general approaches to account for risk in the development of a damages model. These approaches include the capital markets approach, which accounts for risk with the use of a risk-adjusted discount rate, and the expected cash flow approach, which by comparison places a greater emphasis on adjustments for risk directly in the cash flow model and on the use of a lower discount rate. With that in mind, an initial review of some of the applicable foundational elements and terminology provides a basis for further discussion. This initial review focuses on the similarities of an economic damages analysis to the valuation of business interests and intangible assets. Specifically, a damages analysis often requires the conversion of values from future time periods to present value, such as when an award in litigation is intended to compensate a plaintiff for future lost profits. The litigation context often requires different methods from those used in a valuation of business interests or intangible assets, depending on the facts of the particular matter. fn 2 This practice aid is not intended to provide an exhaustive discussion of the cost of capital or valuation theory. For a list of fn 1 For example, see Michael Crain, Bonnie Goldsmith, and Michael Wagner, "Response to One Man s Opinion," CPA Expert, Spring 2004, 4 6, "Case law recognizes that each case has its own set of unique facts and circumstances and requires the expert to consider these relevant facts and circumstances in calculating damages. Therefore, CPAs should determine the most appropriate methodology to use in the damages calculation under the specific facts and circumstances of the case." fn 2 Practitioners performing economic damages calculations are subject to Statement on Standards for Consulting Services No. 1, Consulting Services: Definitions and Standards (AICPA, Professional Standards, CS sec. 100). In addition, practitioners performing business valuations should be aware of the standards set forth in Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset (AICPA, Professional Standards, VS sec. 100). Although SSVS No. 1 does not cover lost profits calculations, those developmental standards may be applicable to other economic damages, including loss of business value. Page 4
5 additional reference materials and publications, see the appendix, "Resource and Reference List," in this practice aid. The Concept of Time Value of Money The concept of the time value of money defines the value of money at one point in time as compared to the value of the money, including the promise or expectation of such, at some other point in time. This concept is within the purview of financial experts, accountants, and economists (hereafter referred to as "experts"), all of whom may find themselves tasked with the conversion of values across time periods. For example, a financial instrument may be required to be reported on a balance sheet at its present value. Or a business may be valued as the sum of the present value of expected future cash flows to be generated by the business. These and other applications may also be seen in the context of legal disputes. For example, consider the event when a company has experienced lost profits as a result of a breach of contract. The lost profits may be from the past or the future. In a transactional context, the price paid for a business is likely to be influenced by the negotiations of a specific transaction, with a host of issues specific to the transaction s context affecting the negotiated value. Similarly, financial computations and values related to a dispute, such as in an award of economic damages, can yield different results given the potential for small but impactful inputs and assumptions even with seemingly similar fact sets. In such cases, courts are often tasked with awarding an exact amount to a plaintiff as of the date of judgment. Circumstances require the trier of fact, as well as experts and legal counsel, to evaluate the facts pertaining to the matter in question. For example, an expert may be engaged to opine about the measure of damages such as lost profits or lost business value, the magnitude of the lost income stream, the duration of the damage period, and the appropriate discount rate to apply to determine the present value of the damages. Effectively accounting for and articulating these subtleties can have a profound impact on the amount of a judgment in litigation. In the course of the expert s development of the bases for these opinions, the objective remains the same to make the plaintiff whole for any losses sustained as of result of the defendant s alleged misconduct. Page 5
6 Chapter 2 Overview Of Time Value Of Money Discounting and present value concepts are based on the idea that a dollar invested today will grow to be worth more in the future. A dollar invested today can earn interest at an interest rate and be worth more in the future, or a future dollar can be discounted with a discount rate to conclude the present value of that future dollar. This idea reflects the notion that there is some value to the use of money for a period of time, as well as the notion that its present value is affected by the risk that the future value will actually occur at the expected level. The calculation of the future value in one year of $1.00 at a 10 percent interest rate (or rate of return) is shown as follows: $1.00 (1 + 10%) 1 = $1.10 Present Value (1 + Interest Rate) number of compounding periods = Future Value The discounting of a future value for one year to a present value is illustrated as follows: $1.00 = $1.10 (1 + 10%) 1 Present Value = Future Value number of compounding periods (1 + Discount Rate) In this instance, the discount factor to convert the future value to a present value for one year at a 10 percent discount rate is 1/1.10, or , when the present value is equal to the future value multiplied by the discount factor. fn 1 The formula for the conversion of the value of money in one period to the value of money in another period is affected by the number of compounding periods (time). In the previous examples, the 10 percent interest rate was applied to an investment period of one year. Similarly, the 10 percent discount rate was used to discount the $1.10 future value one period to a present value of $1.00. With an increased number of compounding perifn 1 The discount factor can also be referred to as the "present value factor." Additionally, some practitioners work with the reciprocal of the discount factor, such that it grows as the discounting increases, and the present value is the future value divided by this version of a discount factor. This is a functionally equivalent calculation. Page 6
7 ods, the amount of growth in the money value increases. The future value of $1.00, assuming a constant 10 percent interest rate for two years, is calculated as follows: $1.00 (1 + 10%) 2 = $1.21 Present Value (1 + Discount Rate) number of compounding periods = Future Value Figure 2-1 The future value example assumes that the original dollar is invested for two periods (years), with the same 10 percent interest rate applied for both years. Thus, the originally invested dollar grows to $1.10 after one year, and then it is compounded at 10 percent again in the second year. At the end of the second year, the original dollar is worth $ , or $1.21. In this present value calculation, the discount factor is 1.00/1.21, or In the event that different interest rates are used in different periods in the compounding process, the future value formula is similar, only slightly more complex. For example, assuming that 10 percent is the interest rate for year one and 20 percent is the interest rate for year two, then the future value calculation performed is as follows: $1.00 (1 + 10%) 1 (1 + 20%) 1 = $1.32 The impact of a higher discount rate is to reduce the present value of future amount of money more than a lower discount rate. fn 2 For example, a $1,000 stream of cash flow for five years will be computed to have a higher present value if the discount rate used to perform the calculation is lower, all else equal. Lower Discount Rate Higher Discount Rate Annual Cash Discount Discount Present Discount Discount Present Period Flow Rate Factor Value Rate Factor Value 1 $1,000 10% $909 20% $833 2 $1,000 10% $826 20% $694 3 $1,000 10% $751 20% $579 4 $1,000 10% $683 20% $482 5 $1,000 10% $621 20% $402 fn 2 For purposes of this practice aid, the terms income and cash flow are both used in describing the development of a present value analysis. In practice, factors such as additions to working capital may call for adjustments to income in order to accurately model value to an investor or owner of an asset. However, income metrics may function well in calculating economic damages in some situations and may be simpler for presentation purposes. Page 7
8 Total $5,000 $3,791 $2,991 As a result, the core inputs that define the conversion of value of a single cash flow from one period to another period are (1) the value in one period, (2) the interest or other rate(s) of return (which may differ period by period), and (3) the number of compounding periods. Use of a Mid-Period Convention The time value of money is also affected if the cash flow amounts are not scheduled to be received at the beginning or the end of a period. In figure 2-1, the Period 1 cash flow receives exactly one period of discounting because the cash flow amounts are assumed to be received as a lump sum at the end of each period. But, if the cash flow amounts were to be earned evenly throughout the period, then a mid-period convention would call for the amount to be discounted for one half of a period. For example, the Period 2 cash flow in the lower discount rate scenario would be discounted for 1.5 periods. In that case, the Period 2 cash flow would be worth $867 instead of $826, which assumes an end-of-period timing, calculated as follows: Nominal Rates and Real Rates $1,000 / (1 + 10%) 1.5 = $867 Discount rates and interest rates can be expressed in nominal terms or in real terms. A nominal interest rate represents an interest rate without an adjustment for inflation. In other words, a nominal interest rate is the stated interest rate. By comparison, a real interest rate represents the interest rate after an adjustment for inflation, such that the rate is calculated as follows: Nominal Interest Rate = (1 + Expected Rate of Inflation) (1 + Real Interest Rate) 1 In practice, when cash flow amounts are presented in nominal dollars, then nominal discount rates should generally be used. And, when cash flow amounts are presented in real dollars, real discount rates should generally be used. Cash Flows and Variability Discounting a future income or cash flow stream to present value is a fundamental procedure in asset valuation. fn 3 Rational buyers are assumed to be willing to pay no more for fn 3 Shannon Pratt, with Alina Niculita, Valuing a Business: The Analysis and Appraisal of Closely Held Companies, 5th ed. (New York: McGraw Hill, 2008), 56. Page 8
9 Figure 2-2 the subject asset than the present value of what they expect to receive in the future. Similarly, rational sellers are expected to sell the subject asset for a price no less than the present value of what they would expect to receive in the future. Like a business or asset valuation performed for nonlitigation purposes, an economic damages computation often takes into consideration the same factors as those considered by buyers and sellers involved in a transaction. These factors include economic benefits to be received in the future and the inherent risks of realizing those benefits. The value to buyers decreases as the risk associated with the income stream increases. The definition of "risk," however, is not as simple as a percentage likelihood of achieving an expected or forecasted result. At times, the possible outcome alternatives are binary either (1) achieve the expected cash flow level or (2) completely fail. This binary outcome scenario is implied in figure 2-2. Promised Probability of Failure Cash Probability of Total Expected Period Cash Flow Delivery Flow Failure Cash Flow 1 $1,000 50% $0 50% $500 2 $1,000 50% $0 50% $500 3 $1,000 50% $0 50% $500 4 $1,000 50% $0 50% $500 5 $1,000 50% $0 50% $500 Total $5,000 $0 $2,500 Figure 2-3 In the previous example, there are only two possible results each year: $1,000 or $0. With a 50 percent likelihood of achievement applied uniformly, the probability weighted expected value is $2,500. There is no time value of money calculation applied in this example. The capital markets approach expresses risk in terms of the variability of results around the expected income (or cash flow) value. As depicted in figure 2-3, given investors aversion to risk and variability, a future value that is certain (the bar graph on the left side) typically is valued higher than a 50 percent chance of twice the same future value (the bar graph on the right side). Page 9
10 Figure 2-4 The bar graph on the left side of figure 2-3 represents a certain outcome, while the bar graph on the right side has two different possible outcomes. Investors typically pay more for the same expected value when the variability of the outcome is less than an alternative investment with the same expected value but more variability. A certainty equivalent is the amount that an investor would accept in exchange for the rights to an outcome that is uncertain. This concept is represented in an example of earnings per share (EPS) variation in figure 2-4. In figure 2-4, Distribution 1 includes possible outcomes ranging from a loss to a gain in excess of $10 per share and a mean expected earnings of $5 per share. However, given the range of possible outcomes and investors' risk aversion, the certainty equivalent is less than the expected EPS of $5 in Distribution 1. In Distribution 2, the range of possible outcomes is tighter, although the mean expected outcome is the same ($5 EPS). Also, there is a lower probability in Distribution 2 of outcomes with substantial divergence from the expected $5 EPS than in Distribution 1. In Page 10
11 Figure 2-5 the capital markets, although both of these company scenarios offer the same $5 expected EPS as a weighted average of the EPS outcomes, the Distribution 2 expectation of less relative variation causes this probability-weighted expected EPS to be worth more than that represented in Distribution 1. fn 4 The certainty equivalents of both EPS distributions in figure 2-4 are less than the mean expected EPS, with a greater penalty to the distribution with greater risk, as seen in the variability of outcomes. This observation is consistent with a 1916 opinion from the U.S. Supreme Court: "It is self-evident that a given sum of money in hand is worth more than the like sum of money payable in the future." fn 5 The relationship between the expected value of an uncertain outcome and its certainty equivalent is affected by an individual investor's risk tolerance. In other words, some investors may be more willing to tolerate a wide range of outcomes for an individual investment, given the investor s ability to diversify away some of the risk. Also, an individual investor may be willing to accept outcomes within a certain range. For example, Distribution 1, with a possible negative EPS, may be unacceptable to some investors. In practice, experts often look at the variability of expected outcomes, represented statistically by the standard deviation. The standard deviation measures how far from the mean the actual result is likely to be. In figure 2-4, the standard deviation of Distribution 1 is greater than the standard deviation of Distribution 2. The standard deviation increases as the range of outcomes increases or as the likelihood of outcomes far from the expected value increases ("heavier tails"). The standard deviation of an investment s expected economic income is typically an important input into the rate of return that investors expect from that investment. In another example, a biotech company may have a 10 percent probability of making $1 billion, a 40 percent probability of making $10 million, and a 50 percent probability of losing $100 million. Based on these hypothetical data, the expected value of the income of the biotech company may be estimated as presented in figure 2-5. Scenario Income Probability Expected 1 $1B 10.00% $100M 2 $10M 40.00% $4M 3 ($100M) 50.00% ($50M) fn 4 The illustrative distributions are bell-shaped; however, in practice distribution curves may be skewed. For example, a mortgage lender may have little opportunity to recover more than the note-related principal and interest, but it may face a variety of potential scenarios for recovering part, or none, of the subject principal or interest. fn 5 Chesapeake & Ohio Railway Co. v. Kelly, 241 U.S. 485, 489 (1916). See also 241 U.S. at 485, 490, 493. Page 11
12 Scenario Income Probability Expected Total Expected Income $54M In contrast, a United States Treasury bill with an expected payment of $54 million, given the government s de minimus risk of default, would yield the same expected income as the biotech company. However, the Treasury bill would be worth more than the example biotech company, even though both investments have the same expected value. fn 6 The valuation of the biotech company would typically involve a valuation adjustment (or penalty) for variability risk, in addition to the discount to reach the $54 million expected value from the $1 billion income from the success scenario. As discussed in this practice aid, the variability of the cash flow streams associated with these investment alternatives is manifested in differing rates of return. In an economic damages analysis, when two different possible outcomes have the same expected value but different ranges of outcomes, then this difference normally results in different present values. The Impact of Time The time to delivery can also affect the present value beyond just discounting for additional future periods at the selected discount rate. For example, if the potential economic return is extended farther into the future, investors may (1) perceive greater uncertainty and (2) conclude a lower present value than is explained by just discounting for additional future periods at the otherwise selected discount rate. This conclusion would be seen in a higher discount rate, as well as an increased number of discount periods. Additionally, the risk-free component will generally be greater simply due to the greater period of time to use the subject investment. For example, a 30-year Treasury bond typically yields more than a 3-month Treasury bill. In the context of an economic damages computation, the time during which economic harm is experienced is often referred to as the damage period. The damage period is defined not only by the judgment of the expert, but also by factors such as applicable law, any contractual arrangements between the disputing parties, the documentary case evidence, witness statements, and market or product research. The damage period may range from a relatively short time frame to, in some situations, perpetuity. Given the effect of the compounding of discount rates, the length of the damage period may be an important factor to consider in selecting a rate or rates for a present value determination. Some experts have used multiple debt instruments, with different maturities for cash flow amounts from different time periods. As an illustration, this may result in a fn 6 There is no time value component in this example. Page 12
13 1-year treasury rate for damages in one time range in a damages calculation and a 5-year treasury for another time range in the calculation. Others have used a rate from one security to be applied to the cash flow stream uniformly. As an example, an expert may use a 3-year security to discount all periods in a 5-year damage period. Each of these two general approaches has been accepted by courts. Summary of Factors Considered by Discount Rates In summary, the amount that a buyer is willing to pay for a business, an asset, or a stream of income, or that a plaintiff should be awarded to replace such an item, is a function of a number of factors, including the expected cash flow or income stream (taking into account the risk of achievement), fn 7 the degree of penalty for risk of variability in returns, the timing of the cash flow or income stream, and the risk-free rate of return. fn 7 In the context of litigation, considerable debate is focused on a plaintiff s "expected" results but for the defendant. Page 13
Forensic & Valuation Services Practice Aid Measuring Damages Involving Individuals
Forensic & Valuation Services Practice Aid Measuring Damages Involving Individuals Page 1 Copyright 2013 by American Institute of Certified Public Accountants, Inc. New York, NY 10036-8775 All rights reserved.
More informationPractice Aid 10 1. Serving as an. Expert Witness. or Consultant 10639-378
Practice Aid 10 1 Serving as an Expert Witness or Consultant 10639-378 NOTICE TO READERS This publication is designed to provide illustrative information with respect to the subject matter covered. It
More informationCash Flow: Know Its Value Today When Buying, Selling, or Expanding
The Business Library Resource Report #26 Cash Flow: Know Its Value Today When Buying, Selling, or Expanding! Rate of Return Components! Risk and Present Value Analysis! You as Seller, You as Buyer! Today
More informationA Piece of the Pie: Alternative Approaches to Allocating Value
A Piece of the Pie: Alternative Approaches to Allocating Value Cory Thompson, CFA, CIRA cthompson@srr.com Ryan Gandre, CFA rgandre@srr.com Introduction Enterprise value ( EV ) represents the sum of debt
More informationA Basic Introduction to the Methodology Used to Determine a Discount Rate
A Basic Introduction to the Methodology Used to Determine a Discount Rate By Dubravka Tosic, Ph.D. The term discount rate is one of the most fundamental, widely used terms in finance and economics. Whether
More informationPresent Value Concepts
Present Value Concepts Present value concepts are widely used by accountants in the preparation of financial statements. In fact, under International Financial Reporting Standards (IFRS), these concepts
More informationSTATEMENT STANDARDS IN PERSONAL FINANCIAL PLANNING SERVICES. PFP aicpa.org/pfp. Personal Financial Planning
INVESTMENT STATEMENT ON STANDARDS IN PERSONAL FINANCIAL PLANNING SERVICES TAX ESTATE Personal Financial Planning PFP aicpa.org/pfp RISK MANAGEMENT RETIREMENT STATEMENT ON STANDARDS IN PERSONAL FINANCIAL
More informationCHAPTER 5. Interest Rates. Chapter Synopsis
CHAPTER 5 Interest Rates Chapter Synopsis 5.1 Interest Rate Quotes and Adjustments Interest rates can compound more than once per year, such as monthly or semiannually. An annual percentage rate (APR)
More informationModule 5: Interest concepts of future and present value
Page 1 of 23 Module 5: Interest concepts of future and present value Overview In this module, you learn about the fundamental concepts of interest and present and future values, as well as ordinary annuities
More informationBusiness Valuation. Presented by: CPA Assurance http://www.cpaassurance.com
Business Valuation Presented by: CPA Assurance http://www.cpaassurance.com Presentation Summary Overview of business valuation approaches Standards of value Valuation adjustments Current developments Using
More informationBusiness Valuation What You Need to Know. Frankel & Reichman LLP www.calcpaexpert.com
Business Valuation What You Need to Know Frankel & Reichman LLP www.calcpaexpert.com Presentation Summary Overview of business valuation approaches Standards of value Valuation adjustments Using a qualified
More informationTHESE FORMS ARE NOT A SUBSTITUTE FOR LEGAL ADVICE.
DISCLAIMER The forms provided on our site were drafted by lawyers with knowledge of equine and contractual matters. However, the forms are not State specific. THESE FORMS ARE NOT A SUBSTITUTE FOR LEGAL
More informationWhat is the fair market
3 Construction Company Valuation Primer Fred Shelton, Jr., CPA, MBA, CVA EXECUTIVE SUMMARY This article explores the methods and techniques used in construction company valuation. Using an illustrative
More informationSeries 16. NBC Deposit Notes NBC Global Companies Deposit Notes. On or about February 12, 2024 FUNDSERV CODE: NBC1485
NBC Deposit Notes NBC Global Companies Deposit Notes Series 16 SALES PERIOD: January 7, 2016 to February 4, 2016 at 4 p.m. ISSUANCE DATE: On or about February 11, 2016 VALUATION DATE: On or about February
More informationonetravel@aol.com 954-540-3697
onetravel@aol.com 954-540-3697 Valuation Principles Good Afternoon! I want to thank all of you who have attended our round table discussion in regards to valuations. Having an independent valuation can
More informationCHAPTER 6. Accounting and the Time Value of Money. 2. Use of tables. 13, 14 8 1. a. Unknown future amount. 7, 19 1, 5, 13 2, 3, 4, 7
CHAPTER 6 Accounting and the Time Value of Money ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics Questions Brief Exercises Exercises Problems 1. Present value concepts. 1, 2, 3, 4, 5, 9, 17 2. Use of
More informationNPH Fixed Income Research Update. Bob Downing, CFA. NPH Senior Investment & Due Diligence Analyst
White Paper: NPH Fixed Income Research Update Authored By: Bob Downing, CFA NPH Senior Investment & Due Diligence Analyst National Planning Holdings, Inc. Due Diligence Department National Planning Holdings,
More informationFocus on Forensics. Providing valuable insights to corporate decision-makers and their legal counsel January 2011
Focus on Forensics Providing valuable insights to corporate decision-makers and their legal counsel January 2011 Business damages measurement: or business valuation? Neil J. Beaton, CPA, ABV, CFF, CFA,
More informationA client guide to business valuation engagements and reports.
A client guide to business valuation engagements and reports. Disclaimer This guide is distributed with the understanding that the author, publisher and distributor are not rendering legal, accounting
More informationAmerican Society of Appraisers. ASA Business Valuation Standards
American Society of Appraisers ASA Business Valuation Standards This release of the approved of the American Society of Appraisers contains all standards approved through November 2009, and is to be used
More informationManagement Accounting Financial Strategy
PAPER P9 Management Accounting Financial Strategy The Examiner provides a short study guide, for all candidates revising for this paper, to some first principles of finance and financial management Based
More informationANALYSIS OF FIXED INCOME SECURITIES
ANALYSIS OF FIXED INCOME SECURITIES Valuation of Fixed Income Securities Page 1 VALUATION Valuation is the process of determining the fair value of a financial asset. The fair value of an asset is its
More informationA Primer on Valuing Common Stock per IRS 409A and the Impact of FAS 157
A Primer on Valuing Common Stock per IRS 409A and the Impact of FAS 157 By Stanley Jay Feldman, Ph.D. Chairman and Chief Valuation Officer Axiom Valuation Solutions 201 Edgewater Drive, Suite 255 Wakefield,
More informationAN INTRODUCTION TO REAL ESTATE INVESTMENT ANALYSIS: A TOOL KIT REFERENCE FOR PRIVATE INVESTORS
AN INTRODUCTION TO REAL ESTATE INVESTMENT ANALYSIS: A TOOL KIT REFERENCE FOR PRIVATE INVESTORS Phil Thompson Business Lawyer, Corporate Counsel www.thompsonlaw.ca Rules of thumb and financial analysis
More informationNOTICE: For details of the project history please look under the Work Plan section of this website.
NOTICE: This Exposure Draft is available to show the historic evolution of the project. It does not include changes made by the Board following the consultation process and therefore should not be relied
More informationNACVA. National Association of Certified Valuators and Analysts
NACVA National Association of Certified Valuators and Analysts The Core Body of Knowledge for Business Valuations All rights reserved. No part of this work covered by the copyrights herein may be reproduced
More informationFEE STRUCTURE PLUS. How can you maximize the value of your contingency fees?
How can you maximize the value of your contingency fees? FEE STRUCTURE PLUS Defer Income and Taxation Earn Market-Related Returns on a Pre-Tax Basis Funds can be Managed by Your Financial Advisor or a
More informationShort-term investments (also known as marketable securities) are easily convertible to cash that a company plans to hold for a year or less.
Accounting Fundamentals Lesson 5 5.0 Receivables & Investments Short-term investments (also known as marketable securities) are easily convertible to cash that a company plans to hold for a year or less.
More informationIntroduction. In today s uncertain environment, what can. high yield, low risk alternative:
Structured t Settlements t A Safe New Way to Double Your Return The Wealth Preservation Institute 3260 S. Lakeshore Dr. St. Joseph, MI 49085 269-216-9978 www.thewpi.org info@thewpi.org 2010 All Rights
More informationContribution 787 1,368 1,813 983. Taxable cash flow 682 1,253 1,688 858 Tax liabilities (205) (376) (506) (257)
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2012 Answers 1 (a) Calculation of net present value (NPV) As nominal after-tax cash flows are to be discounted, the nominal
More informationPresent Value and the Uncertain Future
Present Value and the Uncertain Future BAMSL Seminar St. Louis, Missouri Friday April 22, 2011 Scott Gilbert, Ph.D. Economist & Professor Southern Illinois University Carbondale gilberts@siu.edu (618)
More informationA Primer on Valuing Common Stock per IRS 409A and the Impact of Topic 820 (Formerly FAS 157)
A Primer on Valuing Common Stock per IRS 409A and the Impact of Topic 820 (Formerly FAS 157) By Stanley Jay Feldman, Ph.D. Chairman and Chief Valuation Officer Axiom Valuation Solutions May 2010 201 Edgewater
More informationBusiness Valuation of Sample Industries, Inc. As of June 30, 2008
Business Valuation of Sample Industries, Inc. As of June 30, 2008 Prepared for: Timothy Jones, CEO ABC Actuarial, Inc. Prepared by: John Smith, CPA ACME Valuation Services, LLP 500 North Michigan Ave.
More informationValuing the Business
Valuing the Business 1. Introduction After deciding to buy or sell a business, the subject of "how much" becomes important. Determining the value of a business is one of the most difficult aspects of any
More informationThree approaches to valuing intangible assets
CGMA TOOLs Three approaches to valuing intangible assets Powered by CONTENTS Two of the world s most prestigious accounting bodies, AICPA and CIMA, have formed a joint-venture to establish the Chartered
More informationChapter 6 Interest rates and Bond Valuation. 2012 Pearson Prentice Hall. All rights reserved. 4-1
Chapter 6 Interest rates and Bond Valuation 2012 Pearson Prentice Hall. All rights reserved. 4-1 Interest Rates and Required Returns: Interest Rate Fundamentals The interest rate is usually applied to
More informationTime Value of Money. Critical Equation #10 for Business Leaders. (1+R) N et al. Overview
Time Value of Money Critical Equation #10 for Business Leaders (1+R) N et al. Overview The time value of money is fundamental to all aspects of business decision-making. Consider the following: Would you
More informationChapter 2 Present Value
Chapter 2 Present Value Road Map Part A Introduction to finance. Financial decisions and financial markets. Present value. Part B Valuation of assets, given discount rates. Part C Determination of risk-adjusted
More informationBecause you should retire from work, not life. Retirement plans. By HSBC.
Because you should retire from work, not life. Retirement plans. By HSBC. A new beginning Retirement will be a significant new chapter in your life. A new beginning that will bring new opportunities, new
More informationInternational Glossary of Business Valuation Terms*
40 Statement on Standards for Valuation Services No. 1 APPENDIX B International Glossary of Business Valuation Terms* To enhance and sustain the quality of business valuations for the benefit of the profession
More informationThe Sale of Structured Settlements in Minnesota
The Sale of Structured Settlements in Minnesota Structured Settlements The term structured settlement is defined in Minnesota statutes as an arrangement: for the periodic payment of damages for personal
More informationAre You Playing Russian Roulette With Your Client s Damages Award?
Are You Playing Russian Roulette With Your Client s Damages Award? Prepared by: David Majors, Director, RSM McGladrey, Inc. david.majors@mcgladrey.com John Tira, Senior Associate, RSM McGladrey, Inc. john.tira@mcgladrey.com
More informationGoodwill As It Evolves. By: David D. Riley
Goodwill As It Evolves By: David D. Riley Disclaimer: This article is distributed with the understanding that the information contained does not constitute legal, accounting or other professional advice.
More informationSean R. Saari, CPA/ABV, CVA, MBA
Sean R. Saari, CPA/ABV, CVA, MBA DISCLAIMER All rights reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means graphically, electronically,
More informationMaturity The date where the issuer must return the principal or the face value to the investor.
PRODUCT INFORMATION SHEET - BONDS 1. WHAT ARE BONDS? A bond is a debt instrument issued by a borrowing entity (issuer) to investors (lenders) in return for lending their money to the issuer. The issuer
More informationHow To Calculate Bond Price And Yield To Maturity
CHAPTER 10 Bond Prices and Yields Interest rates go up and bond prices go down. But which bonds go up the most and which go up the least? Interest rates go down and bond prices go up. But which bonds go
More informationTVM Applications Chapter
Chapter 6 Time of Money UPS, Walgreens, Costco, American Air, Dreamworks Intel (note 10 page 28) TVM Applications Accounting issue Chapter Notes receivable (long-term receivables) 7 Long-term assets 10
More informationGeneral Valuation Factors ERISA Counsel May Consider in an ESOP Litigation Case
Forensic Analysis Insights ESOPs and ERISA General Valuation Factors ERISA Counsel May Consider in an ESOP Litigation Case Chip Brown, CPA, and Steve Whittington As part of an ERISA litigation matter involving
More informationVIANELLO FORENSIC CONSULTING, L.L.C.
VIANELLO FORENSIC CONSULTING, L.L.C. 6811 Shawnee Mission Parkway, Suite 310 Overland Park, KS 66202 (913) 432-1331 THE MARKETING PERIOD OF PRIVATE SALE TRANSACTIONS Updated for Sales through 2010 By Marc
More informationFactoring Structured Settlement Life - Contingent Payment Annuities What Judges Should Know
Factoring Structured Settlement Life - Contingent Payment Annuities What Judges Should Know By: Andrew S. Hillman, Esq., President and CEO, Specialty Asset Advisors, Inc. for Seneca One Finance, LLC May
More informationFinal Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator
University of Stavanger (UiS) Stavanger Masters Program Final Exam MØA 155 Financial Economics Fall 2009 Permitted Material: Calculator The number in brackets is the weight for each problem. The weights
More informationModule 1: Corporate Finance and the Role of Venture Capital Financing TABLE OF CONTENTS
1.0 ALTERNATIVE SOURCES OF FINANCE Module 1: Corporate Finance and the Role of Venture Capital Financing Alternative Sources of Finance TABLE OF CONTENTS 1.1 Short-Term Debt (Short-Term Loans, Line of
More informationTopics in Chapter. Key features of bonds Bond valuation Measuring yield Assessing risk
Bond Valuation 1 Topics in Chapter Key features of bonds Bond valuation Measuring yield Assessing risk 2 Determinants of Intrinsic Value: The Cost of Debt Net operating profit after taxes Free cash flow
More informationBasic financial arithmetic
2 Basic financial arithmetic Simple interest Compound interest Nominal and effective rates Continuous discounting Conversions and comparisons Exercise Summary File: MFME2_02.xls 13 This chapter deals
More informationLOS 56.a: Explain steps in the bond valuation process.
The following is a review of the Analysis of Fixed Income Investments principles designed to address the learning outcome statements set forth by CFA Institute. This topic is also covered in: Introduction
More informationChapter 16. Debentures: An Introduction. Non-current Liabilities. Horngren, Best, Fraser, Willett: Accounting 6e 2010 Pearson Australia.
PowerPoint to accompany Non-current Liabilities Chapter 16 Learning Objectives 1. Account for debentures payable transactions 2. Measure interest expense by the straight line interest method 3. Account
More informationAn in Depth Look at Community Banks and Valuations
Scott Deters An in Depth Look at Community Banks and Valuations Presented by Scott Deters, Kent Pummel and Doug Michel Doug Michel Kent Pummel 5 Today s Agenda Community Banks and Valuations - Four primary
More informationFinancial-Institutions Management. Solutions 6
Solutions 6 Chapter 25: Loan Sales 2. A bank has made a three-year $10 million loan that pays annual interest of 8 percent. The principal is due at the end of the third year. a. The bank is willing to
More informationINSTITUTE OF ACTUARIES OF INDIA
INSTITUTE OF ACTUARIES OF INDIA EXAMINATIONS 15 th November 2010 Subject CT1 Financial Mathematics Time allowed: Three Hours (15.00 18.00 Hrs) Total Marks: 100 INSTRUCTIONS TO THE CANDIDATES 1. Please
More informationBody of Knowledge for Professional Business Valuation Certification Programme
Body of Knowledge for Professional Business Valuation Certification Programme Copyright 2014 Institute of Valuers and Appraisers of Singapore. All rights reserved. Copies of this Body of Knowledge may
More informationWeekly Relative Value
Back to Basics Identifying Value in Fixed Income Markets As managers of fixed income portfolios, one of our key responsibilities is to identify cheap sectors and securities for purchase while avoiding
More informationFNCE 301, Financial Management H Guy Williams, 2006
REVIEW We ve used the DCF method to find present value. We also know shortcut methods to solve these problems such as perpetuity present value = C/r. These tools allow us to value any cash flow including
More informationValuing Real Property Going Concerns
Valuing Real Property Going Concerns By Paul R. Hyde, EA, MCBA, ASA, ASA, MAI The Problem Most everyone agrees that valuing real property falls under the purview of real estate appraisers and requires
More informationRobert and Mary Sample
Comprehensive Financial Plan Sample Plan Robert and Mary Sample Prepared by : John Poels, ChFC, AAMS Senior Financial Advisor February 11, 2009 Table Of Contents IMPORTANT DISCLOSURE INFORMATION 1-7 Presentation
More informationMoss Adams Introduction to ESOPs
Moss Adams Introduction to ESOPs Looking for an exit strategy Have you considered an ESOP? Since 1984, we have performed over 2,000 Employee Stock Ownership Plan (ESOP) valuations for companies with as
More informationBuyer s Guide. Copyright 2011; BG3.11 Somerset Wealth Strategies, Inc. All Rights Reserved
Buyer s Guide Copyright 2011; BG3.11 Somerset Wealth Strategies, Inc. All Rights Reserved 10 Facts to Know 1. Secondary Market Income Annuities (SMIA) can provide above average returns for the fixed income
More informationDiscussion of Discounting in Oil and Gas Property Appraisal
Discussion of Discounting in Oil and Gas Property Appraisal Because investors prefer immediate cash returns over future cash returns, investors pay less for future cashflows; i.e., they "discount" them.
More informationHow to Buy and Sell Property FAST in Today s Market!
How to Buy and Sell Property FAST in Today s Market! A land contract is a written agreement between a person who has sold property ("the Seller or Vendor") and the person who bought that property ("the
More informationInterest Rates and Bond Valuation
and Bond Valuation 1 Bonds Debt Instrument Bondholders are lending the corporation money for some stated period of time. Liquid Asset Corporate Bonds can be traded in the secondary market. Price at which
More informationBasics of Corporate Pension Plan Funding
Basics of Corporate Pension Plan Funding A White Paper by Manning & Napier www.manning-napier.com Unless otherwise noted, all figures are based in USD. 1 Introduction In general, a pension plan is a promise
More informationCHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY
CHAPTER 5 INTRODUCTION TO VALUATION: THE TIME VALUE OF MONEY Answers to Concepts Review and Critical Thinking Questions 1. The four parts are the present value (PV), the future value (FV), the discount
More informationInvesting in Bonds - An Introduction
Investing in Bonds - An Introduction By: Scott A. Bishop, CPA, CFP, and Director of Financial Planning What are bonds? Bonds, sometimes called debt instruments or fixed-income securities, are essentially
More informationMULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question.
ECON 4110: Sample Exam Name MULTIPLE CHOICE. Choose the one alternative that best completes the statement or answers the question. 1) Economists define risk as A) the difference between the return on common
More informationSOCIETY OF ACTUARIES FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS
SOCIETY OF ACTUARIES EXAM FM FINANCIAL MATHEMATICS EXAM FM SAMPLE QUESTIONS This page indicates changes made to Study Note FM-09-05. April 28, 2014: Question and solutions 61 were added. January 14, 2014:
More informationADVICENT SAMPLE. Financial Plan. Janet Lerner. PREPARED FOR: Frank and Kathy Accumulator May 27, 2014 PREPARED BY:
Financial Plan PREPARED FOR: Frank and Kathy Accumulator May 27, 2014 PREPARED BY: Janet Lerner Lerner, Stevenson & Assoc. Hartford, Connecticut 555-1234 Table of Contents Cover Page Table of Contents
More informationTOP TEN QUESTIONS OF VALUE
TOP TEN QUESTIONS OF VALUE Throughout my career as a business valuation professional (business appraiser), I have been asked a number of questions repeatedly from the end users of the valuation report
More informationBond valuation. Present value of a bond = present value of interest payments + present value of maturity value
Bond valuation A reading prepared by Pamela Peterson Drake O U T L I N E 1. Valuation of long-term debt securities 2. Issues 3. Summary 1. Valuation of long-term debt securities Debt securities are obligations
More informationIASB/FASB Meeting Week beginning 11 April 2011. Top down approaches to discount rates
IASB/FASB Meeting Week beginning 11 April 2011 IASB Agenda reference 5A FASB Agenda Staff Paper reference 63A Contacts Matthias Zeitler mzeitler@iasb.org +44 (0)20 7246 6453 Shayne Kuhaneck skuhaneck@fasb.org
More informationStructured Settlements
Introduction The Stock Market is inherently risky CDs are paying low interest rates Money Market Accounts aren t much better Government Bonds also have low returns In today s uncertain environment, what
More informationChallenges with Fair Value Measurements for Not-for-Profits
Challenges with Fair Value Measurements for Not-for-Profits A Web Event November 1, 2011 Administrative Notes If you encounter any technical difficulties (e.g., audio issues) during this event please take
More informationFinancial-Institutions Management
Solutions 3 Chapter 11: Credit Risk Loan Pricing and Terms 9. County Bank offers one-year loans with a stated rate of 9 percent but requires a compensating balance of 10 percent. What is the true cost
More informationSome common mistakes to avoid in estimating and applying discount rates
Discount rates Some common mistakes to avoid in estimating and applying discount rates One of the most critical issues for an investor to consider in a strategic acquisition is to estimate how much the
More informationIpx!up!hfu!uif Dsfeju!zpv!Eftfswf
Ipx!up!hfu!uif Dsfeju!zpv!Eftfswf Credit is the lifeblood of South Louisiana business, especially for the smaller firm. It helps the small business owner get started, obtain equipment, build inventory,
More informationEC247 FINANCIAL INSTRUMENTS AND CAPITAL MARKETS TERM PAPER
EC247 FINANCIAL INSTRUMENTS AND CAPITAL MARKETS TERM PAPER NAME: IOANNA KOULLOUROU REG. NUMBER: 1004216 1 Term Paper Title: Explain what is meant by the term structure of interest rates. Critically evaluate
More informationAPPENDIX. Interest Concepts of Future and Present Value. Concept of Interest TIME VALUE OF MONEY BASIC INTEREST CONCEPTS
CHAPTER 8 Current Monetary Balances 395 APPENDIX Interest Concepts of Future and Present Value TIME VALUE OF MONEY In general business terms, interest is defined as the cost of using money over time. Economists
More informationCash Advance Agreement (Case ID: )
Cash Advance Agreement (Case ID: ) THIS AGREEMENT is entered into on this date,, between (hereinafter Seller ), residing in and Peacock Lending (hereinafter Purchaser ). Purchaser and Seller are collectively
More informationSaving For Retirement? Start by Paying Off Your Credit Cards
Saving For Retirement? Start by Paying Off Your Credit Cards David Blanchett, CFA, CFP Head of Retirement Research Morningstar s Investment Management division August 16, 2012 Introduction Credit cards
More informationLDI for DB plans with lump sum benefit payment options
PRACTICE NOTE LDI for DB plans with lump sum benefit payment options Justin Owens, FSA, CFA, EA, Senior Asset Allocation Strategist Valerie Dion, CFA, FSA, Senior Consultant ISSUE: How does a lump sum
More informationCHAPTER 8 INTEREST RATES AND BOND VALUATION
CHAPTER 8 INTEREST RATES AND BOND VALUATION Answers to Concept Questions 1. No. As interest rates fluctuate, the value of a Treasury security will fluctuate. Long-term Treasury securities have substantial
More informationConceptual Framework for Financial Reporting
Conceptual Framework for Financial Reporting Chapter 1: The Objective of Financial Reporting INTRODUCTION OB1. The first chapter of the conceptual framework establishes the objective of general purpose
More informationPractice Bulletin No. 2
Practice Bulletin No. 2 INTERNATIONAL GLOSSARY OF BUSINESS VALUATION TERMS To enhance and sustain the quality of business valuations for the benefit of the profession and its clientele, the below identified
More informationChoice of Discount Rate
Choice of Discount Rate Discussion Plan Basic Theory and Practice A common practical approach: WACC = Weighted Average Cost of Capital Look ahead: CAPM = Capital Asset Pricing Model Massachusetts Institute
More informationTime Value of Money. 15.511 Corporate Accounting Summer 2004. Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology
Time Value of Money 15.511 Corporate Accounting Summer 2004 Professor S. P. Kothari Sloan School of Management Massachusetts Institute of Technology July 2, 2004 1 LIABILITIES: Current Liabilities Obligations
More informationCheap Stock: Final Draft of the AICPA Practice Aid
Cheap Stock: Final Draft of the AICPA Practice Aid Ryan A. Gandre, CFA rgandre@srr.com Introduction n n n Stock options and other forms of stock-based compensation are frequently issued to company officers
More informationChapter. Bond Prices and Yields. McGraw-Hill/Irwin. Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved.
Chapter Bond Prices and Yields McGraw-Hill/Irwin Copyright 2008 by The McGraw-Hill Companies, Inc. All rights reserved. Bond Prices and Yields Our goal in this chapter is to understand the relationship
More informationImperial Holdings, Inc.
Imperial Holdings, Inc. NYSE: IFT July 2011 1 Legal Disclaimer Neither Imperial Holdings, Inc. ( Imperial ) nor its affiliates ( the Company ) make any representations or warranties, express or implied,
More informationIntroduction to Real Estate Investment Appraisal
Introduction to Real Estate Investment Appraisal Maths of Finance Present and Future Values Pat McAllister INVESTMENT APPRAISAL: INTEREST Interest is a reward or rent paid to a lender or investor who has
More informationFundamentals Level Skills Module, Paper F9
Answers Fundamentals Level Skills Module, Paper F9 Financial Management June 2008 Answers 1 (a) Calculation of weighted average cost of capital (WACC) Cost of equity Cost of equity using capital asset
More informationRethinking Fixed Income
Rethinking Fixed Income Challenging Conventional Wisdom May 2013 Risk. Reinsurance. Human Resources. Rethinking Fixed Income: Challenging Conventional Wisdom With US Treasury interest rates at, or near,
More informationValuation of Your Early Drug Candidate. By Linda Pullan, Ph.D. www.sharevault.com. Toll-free USA 800-380-7652 Worldwide 1-408-717-4955
Valuation of Your Early Drug Candidate By Linda Pullan, Ph.D. www.sharevault.com Toll-free USA 800-380-7652 Worldwide 1-408-717-4955 ShareVault is a registered trademark of Pandesa Corporation dba ShareVault
More information