Business Valuation Review Volume 36: Issue 3

Premiums for voting rights of common stock would logically exist in recognition of the fact that a voting privilege conveys a specific benefit compared to shares that either have no vote or that have diluted voting rights. In this article, voting shares are referred to as having “superior voting rights,” while non-voting or diluted voting rights are referred to as having “inferior voting rights.” Conceptually, the rate of return on a superior voting rights stock, other things equal, should be higher compared to shares that have inferior voting rights. Valuation analysts may apply a discount to shares with inferior voting rights compared to a preliminary valuation calculation for company voting shares. The intent of this article is to provide evidence on voting premiums as they currently exist in the US financial markets. The findings include mean voting stock premiums of 8.07% for 2013, 2.74% for 2014, −4.65% for 2015, and 2.70% for 2016.

A recent paper by Finnerty expresses the value of a convertible bond as the value of the straight bond component plus the value of the option to exchange the bond component for a specified number of conversion shares and develops a closed-form convertible bond valuation model. This article illustrates how to apply the model to value nonredeemable convertible bonds and callable convertible bonds. The article also compares model and market prices for a sample of 148 corporate convertible bonds issued between 2006 and 2010. The average median and mean pricing errors are −0.18% and 0.21%, respectively, which are within the average bid-ask spread for convertible bonds during the postcrisis sample period.

In path-breaking articles, Bradley and Jarrell develop an analysis that properly accounts for inflation in the context of constant growth valuation models. They show that many traditional applications of the constant growth model err by failing to properly account for the impact of inflation on the existing capital stock. Despite the publication of the Bradley and Jarrell papers, many leading valuation texts, including Damodaran and Koller, Goedhart, and Wessels, still employ variations of the traditional model, and a good deal of debate remains regarding the applicability of the Bradley-Jarrell approach. In that light, this short note offers a particularly simple and intuitive derivation of the Bradley-Jarrell results that makes it clear why the traditional models are in error when applied to actual or forecasted net operating profit after tax derived from GAAP-based financial statements or forecasts.

I enjoyed seeing many of you at the Advanced Business Valuation Conference in Houston. Despite hurricane Harvey's efforts to slow us down, the conference was a great all-around success. Conference chair Bruce Johnson, ASA, and his committee pulled together an outstanding slate of presenters. And conference coordinator Lisa Perry didn't miss a beat handing all the logistical complexities. Thank you both for all your efforts.

Mark your calendar for next year's conference, October 9–10 in Anaheim, California.

Regulatory Victory

As you may have heard, Treasury Secretary Steven Mnuchin has recommended that the IRS withdraw its controversial proposed rule IRC §2704

Editor's Column

Premiums for Voting Rights in the 2013–2016 Time Period

Valuing Convertible Bonds: A New Approach

A Note on Estimating Constant Growth Terminal Values With Inflation

Avoiding Value Double-Count in Companies With Cross-Holdings

From the Chair

Regulatory Victory

Volume 36, No. 3 — Complete Issue

From the Editor

Customer Concentration: Good, Bad, or Ugly?

From the Chair

Delaware Valuation Decisions, 2021 to 2024

Volume 44, No. 1 — Complete Issue