Volume 4, Issue 1 - Hurricane Katrina and Economic Loss

When a buy-sell agreement exits, current valuation approaches based upon the "typical buyer" concept do not address the specific triggering events in the agreement. Until now, no approach has been put forth that addresses valuations based upon the triggering events, which produce different values to different interests. The proposed conditional probability approach provides a totally transparent, objective fair market valuation of a specific noncontrolling interest when 1) triggering events do not occur, 2) a triggering event fails to provide a formula, or 3) the agreement fails to fully specify what the parties intend by fair market value.

The capital asset pricing model (CAPM) and the discounted cash flow (DCF) method have been used to establish a 95% confidence interval for the value of the Transurban Group, owners and operators of toll roads in Australia and the United States. As the value claimed in the financial statements is well in excess of the upper limit, it is concluded that Transurban is overvalued. This conclusion is supported by other evidence. Overvaluation has increased the risk of insolvency through excessive borrowing. For example, in 2008 cash at bank was only about 5% of the total liabilities.

Neither the literature of finance nor the literature of valuation practitioners has taken account of the relatively short life expectancy of firms. Fewer than fifty percent of new firms live longer than ten years; yet, it is common practice to estimate firm value with a very long term horizon model such as the constant growth model. The purpose of this paper is to increase awareness of the life expectancy of firms and show how to take account of the likelihood of firm death in valuation. Data on firm death rates and life expectancy that is available in the field of industrial organization is reviewed and summarized so that valuation practitioners can take it into account in their valuations.

This paper examines the periodic net discount rate using genetic programming (GP) techniques to build better short-term forecasts. Standard GP techniques require human judgment as to which data window to use, which may be problematic due to structural breaks and persistence (or long memory) in the net discount rate. We use a recently developed extension of GP to overcome this problem. While our results show no significant out-of-sample forecast improvement relative to the linear alternative or random walk model over the full sample, they do provide evidence as to the stochastic nature of the net discount rate considering the AR(3) model yielded lower forecasting errors in the post-1982 sample.

This paper presents two new models for valuing closely held businesses that are experiencing growth. These models supplement the existing growth model and incorporate alternate assumptions regarding the character of future growth.

Qualitative judgments are an integral part of business valuation practice. These judgments are often viewed with suspicion as being "subjective" and more prone to bias than quantitative procedures. These judgments are not subjective and not necessarily biased. However, qualitative judgments are often a source of bias and their abuse can and often does lead to wildly inconsistent results in actual practice.The solution to this problem is not the elimination of qualitative judgments. This is neither desirable nor possible. Two approaches to the treatment of qualitative judgments may reduce their misuse: first, judicious limiting of acceptable choices in making particular judgments and second, the breaking down of large qualitative judgments into smaller components by wider use of ordinal scale.

Private equity has become a huge force in American business, but how is it creating value. The paper shows that private equity firms in recent years have paid high prices for acquired companies, leveraging them up, and then hoping to sell them to someone else. Doubts are raised as to whether this is a good strategy for investors or the nation.