Journal of Business Valuation and Economic Loss Analysis

Published by De Gruyter

Volume 8 Issue 1 -

Issue of Journal of Business Valuation and Economic Loss Analysis

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Contents
Journal Overview

Masthead

December 6, 2013

Masthead

Page range: i-iv

May 14, 2013

Risk-Based New Venture Valuation Technique: Win-Win for Entrepreneur and Investor

Whittington P. Vara

Page range: 1-26

Abstract

Abstract : New ventures that lack a financial history and have a future that is not only unknown, but may be unknowable pose unique problems to the investment community. Since conventional valuation techniques do not work in these cases, entrepreneurs and investors resort to techniques that rely more on art than finance. Although a reduction in information asymmetry usually leads to an agreement between two parties, the methods the entrepreneur or investor use to value a new venture tend to increase this information gap. The author proposes a logical, systematic risk-based new venture valuation technique that reduces information asymmetry during this process.

May 14, 2013

What Influences the Discount Applied to the Valuation for Controlling Interests in Private Companies? (An Analysis Based on the Acquisition Approach for Comparable Transactions of European Private and Public Target Companies)

Marcus Scheibel, Christian Klein

Page range: 27-51

Abstract

Abstract : In this study, we analyze what influences the size of the PCD for controlling stakes. As empirical research has shown, the discount applied to the value of private companies (or controlling stakes) can be quite significant. What is not clear, however, is what influences such a discount. In our study, we decided to analyze this issue focusing on the listing costs and the different types of buyers (listed or not listed) of the target companies. Since a private target company that is acquired by a publicly listed buyer is quasi automatically listed (through the acquisition) a public buyer saves the potential listing costs for the target company and should, therefore, be able to pay a higher price for the private target company, i.e., apply a lower, or no, discount for the private company. We use the acquisition multiple approach on a matched-pair sample (as done by Koeplin, Sarin and Shapiro 2000) for European target companies from 1999 to 2009. Thereby, we observe that, on average, the discount for private companies is different for the two types of buyers and a private buyer pays less for a private target than a public buyer.

May 14, 2013

Guideline Public Company Valuation and Control Premiums: An Economic Analysis

Bradford Cornell

Page range: 53-69

Abstract

There is a long running valuation debate regarding whether a control premium should be added to valuation based on guideline public companies because the share prices of the guideline companies represent marketable minority positions. This paper attempts to resolve that debate by developing a more complete economic model to analyze the issue. Based on the economic model, which highlights the potential motives for acquisitions, I conclude that no adjustment for a control premium is required to appraise a company on a current going concern basis. If the goal is to value a company at its highest value use, including as part of another company, then an adjustment to take account of the benefits of synergies, if there are any, is required. However, historical averages of acquisition premiums will overstate the proper adjustment.

October 15, 2013

Valuing Installment Loan Receivables

Paul R. Goebel, Timothy W. Koch, Scott S. Macdonald

Page range: 71-90

Abstract

Following the recent financial crisis, many banks are finding it increasingly difficult to book earning assets. To this end, many larger organizations are attempting to expand their consumer operations because of their relatively high promised returns. One dramatic move is to focus on the historically under-banked customers who do not have banking relationships. Another is to either create or purchase traditional consumer loan portfolios to achieve higher yields and to potentially transfer these assets to off-balance-sheet vehicles for capital requirement purposes. When purchasing these portfolios, regulatory approval is required, using an approved valuation method. Two alternative methods of valuing a portfolio of small, high-risk, high-overhead expense loans are presented and compared in this article. The first method, one approved by federal bank regulators in private examination cases, uses the accounting principle of valuation of an intangible asset. The present value of identifiable valuables (book value of the loan portfolio in this case) is added to the present value of the unidentifiable valuables (the above average rate of return of the risky cash flows in this case). The second method uses a “certainty equivalent” or “expected value” approach in which the certainty equivalent factors are estimated from historical data. The two methods produce similar but different values of the loan portfolio. The similarities and difference between the two approaches should shed light on the usefulness of the two alternatives in meeting government regulations as well as accurately valuing bank assets.

October 15, 2013

Firm Valuation with Bankruptcy Risk

L. Peter Jennergren

Page range: 91-131

Abstract

Traditional firm valuation discounts forecasted cash consequences that are understood as expected values under some scenario. It is not clear how, and to what extent, uncertainty is incorporated in the valuation. This article constructs a new valuation model where uncertainty, in particular bankruptcy risk, is explicitly included. Bankruptcy denotes a failure situation where a company ceases to operate and its assets are liquidated. At the end of each year, there is a jump to one of three possible states of the world at the end of the following year. A state is a combination of sales revenue for the firm being valued and return on the market index. The third state implies bankruptcy for the firm. The new model includes both the non-steady-state explicit forecast period and the steady-state post-horizon period and derives consistent values for the unlevered firm, the debt, the tax shields, the equity, and the levered firm. All discount rates, and the promised debt interest rate, are derived from certain basic parameters, using the CAPM. The model structure, in particular the manner in which sales revenue serves as driving variable, implies that one needs to perform only one discounting operation for each year, like in Fama (Journal of Financial Economics 5:3–24, 1977). A small annual bankruptcy probability is seen to lead to a noticeable value decrease. There is also a discussion of how to combine traditional firm valuation with inputs from the new valuation model, so as to take bankruptcy risk into account.

October 15, 2013

Royalty Rate Determination

Peter Dawson

Page range: 133-161

Abstract

Courts require royalty rate calculations based on rigorous economic foundations. The licensing literature provides limited guidance for royalty rate determination, leaving appraisal report readers wanting a more tangible and objective lens through which to judge the credibility of royalty rate analyses. This article develops the standard, core model for calculating market royalty rates for intangible asset licenses where royalty rates are determined ex ante in the actual market, or ex post in a hypothetical market under a Market Value Standard. The model forms a consistent basis for performing and evaluating licensing royalty appraisals. Not being distracted with the question of how to combine the input values when calculating a royalty rate, the court can focus on understanding and verifying an appraiser’s calculations of the input variable values.

November 27, 2013

The Valuation of Tax Loss Carryforwards

Felix Georg Streitferdt

Page range: 163-184

Abstract

This article shows that future tax savings from a tax loss carryforward equal a portfolio of options based on the taxable base. Unfortunately, the assumption of a geometric Brownian motion is not applicable for the taxable base, since it implies that a positive taxable base, for example, will never become negative and vice versa. Therefore, the famous Black and Scholes formula cannot be used for valuing this portfolio of options. In order to solve this problem, we assume an arithmetic Brownian motion for the taxable base and derive a formula for valuing tax loss carryforwards within a single-period model. In a multiperiod context, a Monte-Carlo simulation based on our findings provides reasonable results. This methodology can also be used to value the tax shields arising from debt if the interest expenses cannot be used in full during the period in which they occur. Our simulation suggests that the assumption that interest expenses are immediately deductable will yield inadequate company values.

About this journal

Objective
The Journal of Business Valuation and Economic Loss Analysis (JBVELA) is a refereed academic journal that publishes continuously throughout the year and is co-edited by Bradley Ewing and James Hoffman. The mission of the Journal of Business Valuation and Economic Loss Analysis is to improve the practice of business valuation, economic loss analysis, and risk management by helping to inform academics, practitioners, and attorneys about theoretical and practical developments in these fields.

Topics

business valuation
economic loss analysis
risk management

Article formats
Research articles
The journal publishes three categories of manuscripts. The first category encompasses both empirically- and conceptually-based manuscripts that advance the fields of business valuation, economic loss analysis, or topics related to risk. The second category of manuscripts focus on the description of how theory has been put into practice, including case study examples. The third category of manuscripts concerns how recent rulings and changes in the law affect business valuation, economic loss analysis, and risk management practices, assessment, and analysis.

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