Volume 12, Issue 1 -

In this paper we present an approach to value-based management of companies using time series analysis. We present a technique for projecting cash flows in order to calculate the company value using time series analysis. We consider a new, indirect approach and a direct approach of projecting cash flows. We analyse both models from the perspective of value-based management. Finally, company value is calculated for both models, as a point estimate and as a distribution function respectively. As shown in the article, the distribution function of corporate value is a normal distribution function. On this basis, it is possible to apply all instruments of value-at-risk analysis.

In this paper we develop a model to value debt related tax savings and associated yield rates for debt in a setting where future cash flows are uncertain and follow a stochastic diffusion process. By explicitly modeling a default trigger we find that tax shield values in standard Discounted Cash Flow (DCF) valuation formulas are too high as they do not correctly incorporate the risk of default. Furthermore, we are able to endogenously derive risk-adjusted yield rates, while keeping the overall simple and tractable structure of the DCF approach.

The Implied Private Company Pricing Line (IPCPL) model is intended to calculate a reliable present value discount rate for a 100 % control interest in a private/closely-held operating company under the Fair Market Value Standard. But, would its application be more reliable than the Adjusted Capital Asset Pricing Model (ACAPM) or Build-Up Method (BUM)? This article evaluates two core aspects of the model’s practical application that have received little attention in the literature: (1) Does it eliminate a significant portion of subjective adjustments? The private company market’s adjustment for key marketability differences is said to be built into the private company transaction prices, eliminating the need for an appraiser to subjectively quantify and apply those adjustments; and (2) Being “actual market clearing prices”, do the private company transaction prices reflect Fair Market Value?

Patents without established market values (e. g., no negotiated royalty rates) are often valued by comparing the number of citations the patent has received to the numbers received by other patents whose market values are established. For recently-issued patents, which have not had time to accumulate citations, this procedure can be noisy or even inapplicable. The current paper generalizes this valuation method to incorporate patent characteristics that relate to the number of citations the patent is expected to obtain in the future. We estimate statistical models in which the explanatory variables are observable characteristics of the patent at a given time, and the dependent variable is the number of citations that the patent receives after that date. Using several examples, we demonstrate a procedure for patent valuation that incorporates the statistical results, such that the valuation reflects the number of citations the patent has already received as well as the number it is expected, based on its characteristics, to receive in the future.

The greater a target company’s leverage, the less cash or shares an acquirer needs to control the target enterprise. Given the benefits of acquiring a target, the equity takeover premium is spread over relatively more assets in a more highly leveraged target, thus reducing the premium paid relative to the entire enterprise. This suggests that more levered targets may receive greater equity premia, expressed as a percent of the unaffected share price, other things equal. To test this, we examine takeover transactions that occurred during the 2003–2013 time period. We find that higher equity takeover premia are related to higher pre-deal leverage levels, consistent with theory. Our results are robust with respect to size, industry, profitability, year of transaction, synergy potential, and type of acquirer (strategic, horizontal or financial). Our empirical analyses support the Appraisal Foundation Working Group’s recommendation for best practices, namely, to adjust takeover premia for leverage.

ARIMA forecast methods offer short term accuracy but have severe limitations in the appraisal context. ARIMA forecasts fail to identify or model causal variables, require more data points than are usually available and are very difficult to explain to non-statisticians. Better forecast alternatives are available to appraisers.

The expert business valuator’s primary responsibility is to assist the Court in the understanding of complex financial and economic issues impacting the valuation of an asset or damages claim. The Courts expect valuation opinions that are unbiased and impartial. But empowering the advocate-lawyers to select and engage those valuators misaligns the reward system. The reward the expert valuator seeks is the engagement itself – being appointed to the case. The current system of lawyer-engaged experts acts as an impediment towards absolute impartiality. Court-appointed experts may be the easiest means of eliminating role-conflict and realigning the reward system so that the expert valuator is focused upon the primary goal of serving the Court’s needs.