Business Valuation Review Volume 37: Issue 2

Under FASB Accounting Standards Codification 718 (formerly FAS 123[R]), equity compensation granted to employees is valued at fair value at the time of the grant and then expensed. Valuation analysts routinely quantify the dilutive effect that stock-based compensation (SBC) has on entity equity value. This dilution can be attributed to SBC that was granted in periods prior to the valuation date and SBC that is expected to be granted in future periods. It is important that the valuation analyst understands the characteristics of the different types of securities that give rise to shareholder dilution and how to properly account for the dilutive effect of these securities. This technical paper provides an overview of the accounting treatment of SBC and a discussion of the methods to address SBC in the valuation process when estimating entity equity value.

The liquidity discounts in the first seventy-two Troubled Asset Relief Program (TARP) auctions of preferred stock averaged 9.6%. The liquidity discounts were significantly lower for publically held banks and banks that had never missed a bailout dividend. In addition, auction yields were significantly higher, 152 basis points higher, in private placements open only to accredited investors. This paper develops two different valuation frameworks based on accounting: call report data to estimate the yields and present value of untraded preferred stock. The TARP auction yield to maturity averaged 9.85% in the auctions studied.

Using option models to determine blockage discounts has been a common practice for over twenty years. As with any technique, periodic updating and improvement is to be expected. We hope this article contributes to this end. The Market-Derived Blockage Discount Model presents a mathematical means for determining the appropriate selling period in a blockage “dribble out” analysis. If we sell too much at one time, the price impact is too great. If we create too long of a dribble out period, the cost of the option is too high. The optimum holding period is the one that achieves the lowest cost. Furthermore, it is our contention that the sale transaction(s) envisioned in the blockage analysis will have an immediate impact on the volatility of the stock price and that this marginal increase in volatility should be accounted for in the option model. What we have found from this model is that, depending upon the depth of a stock's market, blocks much smaller than previously presumed can create a measurable blockage effect.

Greetings! It's always a little challenging to provide timely comments in this column because it is written a few weeks prior to publication. Please forgive me for updating you from the perspective of early June 2018.

Los Angeles Fair Value Conference

I'm writing this column immediately following another successful year for the Los Angeles Fair Value Conference. Co-presented by the ASA and University of Southern California—and graciously hosted this year by KPMG—the 13th year for the conference was anything but unlucky. Presentations covered several timely issues affecting appraisers working in the fair value/financial reporting arena, including rates of return, effect

Editor's Column

American Society of Appraisers Business Valuation Committee Special Topics Paper #5 Consideration of Stock-Based Compensation in the Valuation Process

Liquidity and Private Placement Discounts in the TARP Preferred Stock Auctions

Determining the Cost of Blockage by the Market-Derived Blockage Discount Model

Suggested Quality-Assurance Practices for Monte Carlo Analysis of a Geometric Brownian Motion Process

From the Chair

Los Angeles Fair Value Conference

Volume 37, No. 2 — 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