Abstract

The WACC is just the rate at which the Free Cash Flows must be discounted to obtain the same result as in the valuation using Equity Cash Flows discounted at the required return to equity (Ke)

The WACC is neither a cost nor a required return: it is a weighted average of a cost and a required return. To refer to the WACC as the “cost of capital” may be misleading because it is not a cost.

The paper includes 7 errors due to not remembering the definition of WACC and shows the relationship between the WACC and the value of the tax shields (VTS).

Abstract

Valuation engagements for businesses with complex capital structures offer unique challenges to the valuation analyst. Complex capital structures frequently accompany a relatively high level of uncertainty surrounding the prospects of the subject company, and determination of enterprise value will almost certainly require techniques beyond those sufficient for valuing established companies. Moreover, once enterprise value has been determined, valuation of the various components of the capital structure will present additional challenges. The purpose of this article is to demonstrate the strengths (and limitations) of the option-pricing method (used in conformance with the AICPA's “Valuation of Privately-Held-Company Equity Securities Issued as Compensation”) in allocating enterprise value between the various components of a complex capital structure. We demonstrate that binomial lattice models have enormous flexibility and can be tailored to accommodate virtually any feature or attribute typically found in employee stock options, warrants, and convertible securities. We also explain circumstances where the option-pricing method should be combined with simulation modeling in order to impound and value certain features of complex capital structures.

Abstract

Customer relationship populations are aggregated from individual customer accounts with statistical procedures founded in actuarial science used to numerically portray customer retirement behavior. Customer account life expectancy is described as a survivor curve that explains the pattern of customer relationship decline for a population. The customer relationship valuation process necessitates the separation of the actuarial life characteristics from the economic attributes of the customer relationship population with the application of a discounted cash flow analysis.

The valuation of specific intangible assets has always been a component of our profession's work, ranging from valuing patents in support of infringement litigation to establishing basis for tax compliance. In recent years, as intangible asset value has become a larger component of market capitalization, the importance of intangible asset value has grown. This is evidenced with expanded financial reporting requirements regarding intangible assets and increased review of intangible asset valuations by regulatory groups including the Securities and Exchange Commission (SEC) and Public Company Accounting Oversight Board (PCAOB). The ASA has been in the forefront of this trend, offering for

Editor's Column

Economic Observations

WACC: Definition, Misconceptions, and Errors

Abstract

Using Binomial Lattice Models to Value the Components of a Complex Capital Structure

Abstract

Account Attrition, Survivor Curves, and Customer Relationship Valuation

Abstract

Cost of Capital in Appraisal and Fairness Cases

Introduction

Developing the Cost of Equity Capital: Risk-free Rate and ERP during Periods of “Flight to Quality”

Introduction

Distribution and Statistical Behavior of Implied Volatilities

Abstract

From the Chair

Volume 29, Issue 4

From the Editor

Customer Concentration: Good, Bad, or Ugly?

From the Chair

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue