Cost of Capital in Litigation : Applications and Examples

by Shannon P. Pratt; Roger J. Grabowski

• ISBN13: 9780470944912
• ISBN10: 0470944919
• Format: eBook
• Copyright: 2010-10-01
• Publisher: Wiley

Summary

Praise for Cost of Capital in LitigationApplications and Examples"After revising their existing text, Cost of Capital: Applications and Examples, the authors have endeavored to expand their treatment of the subject and further explore the role of cost of capital in the courts.?Addressing various methods for calculating value and different standards of value, the authors explain how courts may differ in their decisions based on the topic, jurisdiction, or available evidence. This new compilation is an important contribution to the field of valuation and will serve as an imminently helpful resource for attorneys and judges. Shannon Pratt and Roger Grabowski have provided yet another thoughtful,?helpful,?and excellent resource for all practitioners interested in how appraisers and courts have, and should, arrive at value."? -From the Foreword by?David Laro, Judge, United States Tax Court"Cost of Capital in Litigation is a very helpful resource for litigators faced with valuation disputes involving an assessment of discounted cash flows. In the area with which I am most familiar-Delaware valuation law-it is thorough and insightful. More important to me, its introductory material nicely lays out the conceptual structure of the valuation issue, and the remaining chapters gather lots of information about the treatment of the issue in areas with which I am less familiar, (such as bankruptcy law and domestic property litigation)."? -Lawrence A. Hamermesh, Ruby R. Vale Professor of Corporate and Business Law, Widener University School of Law, Wilmington, Delaware"Cost of Capital in Litigation comprehensively deals with a difficult subject, pointing out common grounds as well as differences among experts in the treatment of this subject.? It is a must first stop for the uninitiated in the subject and the ultimate checklist that every practitioner should consult.?Particularly useful are the chapters focusing with the eyes of experts on the treatment of cost of capital in specific areas of litigation.?Notably, the authors alert the reader to those aspects of the various methods for determining cost of capital that may differentiate among the suitability of the methods based on available data, the circumstances presented, and the legal issue under consideration." -Reeves Westbrook, Esq., Partner and Chair of the Tax Group, Covington & Burling LLP"Shannon Pratt and Roger Grabowski have consolidated information on important theoretical valuation frameworks, practical applications, and case law needed by finance professionals, attorneys, and judges in these challenging times. Cost of Capital in Litigation serves as a solid well-written reference on cost of capital and valuation that I recommend to both practitioners and students." -Theodore Barnhill, Professor of Finance and Director of the Globaland Entrepreneurial Finance Research Institute, The George Washington University"Valuation in litigation settings requires careful analysis, solid evidence, and defensible positions.?Cost of Capital in Litigation details the nuances and subtle but critical elements of crafting a defens-ible position for experts, attorneys, and others who need to understand how and why valuation cases are won and lost." -Hal Heaton, Professor of Finance, Marriott School of Management, Brigham Young University"Discount rates are often crucial components in calculating damages.?Even small changes in these numbers can?have large effects on the amounts in dispute-and the?magnitude of damages won or lost.?Cost of Capital in Litigation explains the underlying economic theory. It then offers separate chapters elaborating on rate of return approaches in their widely varied forensic contexts.? This?helpful compendium even includes an outline of cost of capital questions for use by attorneys and their financial experts.? No business litigator should be without it."

Table of Contents

About the Authors

Foreword

Preface

Acknowledgments

Notation System and Abbreviations Used in This Book

Cost of Capital Basics

Introduction

Components of a Capital Structure

Characteristics of Cost of Capital

Cost of Capital Equals the Discount Rate

Net Cash Flow

Discount Rate is not the Same as Capitalization Rate

Cost of Capital Should Reflect Risk of the Investment

Estimating the Cost of Equity Capital and the Overall Cost of Capital

Introduction

Estimating the Cost of Equity Capital by the Build-up Method

Estimating the Cost of Equity Capital by the Capital Asset Pricing Model

Other Methods for Estimating The Cost Of Equity Capital

Overall (Weighted Average) Cost Or Capital

Other Cost of Capital Considerations

Introduction

Standard of Value

Handling Discounts for Lack of Marketability

How the Cost of Capital Relates to the Excess Earnings Method of Valuation

Adjusting the Discount Rate to Alternative Economic Income Measures

Converting from After-tax Rates to Pretax Rates

Cost of Capital in Estate & Gift Tax Matters

Introduction

Acceptance and Rejection of DCF

Evaluation of Cash Flow Forecasts

Equity Rate vs. WACC

Build-Up, CAPM, or Something Else?

Cost Of Equity

Consistency Of Data

Courts Demand Supporting Detail

Cost of Capital for a Regulated Company

S Corporations

Summary

Cost of Capital Considerations in Corporate Restructuring and Other Federal Tax Matters

Introduction

Legal Entity Valuations

Intercompany Debt

Worthless Stock

Transfer Pricing Disputes

Summary

Cost of Capital Included in Damage Calculations

Introduction

Why Discounting Is Necessary

Is A Risk-Free Discount Rate Appropriate?

Cost Of Capital Is The Appropriate Risk-Adjusted Discount Rate

Common Errors In Discounting Lost Profits

Exclusion Of Expert Testimony

Summary

Cost of Capital in Intellectual Property Disputes

Introduction

Categories of Intellectual Property Disputes

Cost of Capital Issues In Intellectual Property Disputes

Court Guidance Regarding Discount Rate Selection

Other Considerations

Summary

Cost of Capital in Bankruptcy

Introduction

Cost of Capital for Debt: Cram Down Interest Rates

Cost of Capital for Assets

Cost of Capital for a Business Enterprise

Summary

Cost of Capital in Appraisal, Oppression and Fairness Cases

Introduction

Discounted Cash Flow in Delaware Law

Capital Asset Pricing Model

Components of Weighted Average Cost of Capital

Risk-Free Rate

Cost of Equity

Cost of Debt

Capital Structure

Beta

Industry Risk Premium

Size Premium

Company-Specific Risk Premium

Build-Up Method

Additional Points

Role of the Expert

Summary

Cost of Capital in Family Law Matters

Introduction

Cost of Equity Capital versus WACC

Capital Structure: Industry versus Business

Solving for Market Value Weight Proportions and the Cost of Equity Capital

The Hidden Impact of Rounding

Cost of Capital in family law courts

Summary

Cost of Capital in Ad Valorem Taxation

Introduction

Unitary Property

Company Cost of Capital Versus Asset Cost of Capital

Assessed Value versus Market Value

General Categories of Legislative Constraints that Necessitate Adjustments to the Cost of Capital

Capital Structure

Weighted Average Cost of Capital

Ad Valorem Tax Adder

Flotation Costs

WACC versus WARA

Cost of Capital in the Courts

Summary

Cost of Capital in Regulated Industries

Introduction

Overview of Regulatory Decision-making Process

Role for Cost of Capital

Alternative Approaches to Setting Cost of Capital

Specific Issues by Technique

Other Methods Being Developed

Railroad Cost of Capital Issues

Summary

Questions to Ask Business Valuation Experts

Introduction

Examination Outline

International Glossary of Business Valuation Terms

Bibliography

Index

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