Volume 7, Issue 1

This paper focuses on business interruption litigation and how to compute lost profits as a remedy. The main contribution of the paper is development of a general model of economic damages which assesses lost profits by measuring the incremental changes in revenue, variable costs, and fixed costs. Prior treatments can be understood as special cases to this general model. Several sources of economic damages can now be considered due to business interruption, including changes in prices, quantity sold, variable cost structures, fixed costs, and extraordinary expenses. We also offer case examples using the proposed framework and provide practitioners with suggestions for damages estimation.

In future value calculations, investors often assume that the real return is constant over the planning horizon. We examine whether this assumption is appropriate. Our results suggest that investors can expect to earn the historical average real return provided their horizon is at least 15 years for stocks and at least 7 years for bonds, depending on the size of recent shocks. This “rule of thumb” assures reasonable insulation from the inevitable fluctuations of the market.

We extend the analytical framework of traditional DCF models to allow for the possibility of a time-varying cessation risk for cash flows. We first set out a parsimonious functional form for time-dependent survival probability of cash flows and then derive a closed-form solution for cessation risk-adjusted discount rates within a DCF model. Application of the model to a new data set, created for this paper, demonstrates that U.S. start-up firms face considerable risk of cessation, particularly during the first five years of their existence. This finding suggests that the time-varying discount rates that are appropriate to value them are considerably higher than those used in traditional DCF models.

Legal disputes over compensation paid almost a century ago in lieu of a cash flow stream spanning a few decades present a number of challenges. These difficulties involve interrelated conceptual issues as well as technical obstacles. The re-evaluation of the compensation, in terms of dollars of the compensation time, requires knowledge of the yield curve at that time. However, the kept records of historical yield, is of only one rate: the long term spot rate. The rate was recorded and kept for the first business day of each month. Furthermore, the evaluation in today's dollars requires present/future value calculations spanning over thirty years while yields for such a long duration are not observable. The paper offers a conceptual overview, proposes a methodology to overcome the technical difficulties, and exemplifies the implementation process.

A flow through entity is a legal form of entity choice where income is passed directly to the owners. Types of flow through entities are; general partnerships, limited partnerships, limited liability companies, master limited partnerships and S Corporations. Although, a common tax regime exists among S Corporations, partnerships, limited liability companies, and master limited partnerships, prior literature has implied there should also be corresponding valuation parity among these entities. The literature is void in identifying a fact pattern of when a situation arises that provides a distinction of such potential valuation differentials. This research intends to add incrementally to the literature by investigating acquisition transactions of privately held flow through entities to determine which characteristics moderate valuation differentials between these types of entities.

This study compares the value of small privately held firms with similarly sized, small publicly held firms when the businesses are actually sold to ascertain the private ownership discount. These results are important to better understand the effects of public ownership and liquidity on the valuation of small firms. The data show a public ownership discount that is pronounced and statistically significant for smaller firms ($20-100 Million selling price) opposite of the traditional view of a discount for the privately held firms. For the larger firms in our sample ($100-1,000 million), public firms sell at a premium over similar sized private firms. The data also show a significant discount for the smaller firms as a group as compared to the larger firms.The effect of SOX on the valuation is also considered. We find that, from the stand point of net effect on value, there is a statistically insignificant negative effect on both the firms in our “larger” group and our “smaller” group.