The Lawyer's Guide to the Cost of Capital Understanding Risk and Return for Valuing Businesses and Other Investments

by Pratt, Shannon; Grabowski, Roger

• ISBN13: 9781627227230
• ISBN10: 1627227237
• Format: Paperback
• Copyright: 2016-02-07
• Publisher: American Bar Association

Summary

Cost of capital is arguably the most important concept in all of finance, as it is the expected rate of return that market participants require to attract funds to an investment. The cost of capital estimate is the essential link that enables a business to convert a stream of expected income into an estimate of present value. The Lawyer's Guide to the Cost of Capital provides the most comprehensive survey of cost of capital case law across jurisdictions and venues.

Cost of capital is a key topic in the valuation of business interests, particularly interests in closely held entities, and this book provides offers attorneys, judges, and valuation experts with a comprehensive sourcebook for understanding the basis of a business valuation and for background in examining and cross-examining expert witnesses. Authors Shannon Pratt and Roger Grabowski, both nationally recognized experts on all aspects of business valuation, explain the concept of "cost of capital" in a manner that is both logical and understandable. They present the basics of the cost of capital in almost any situation, including valuing equity versus invested capital; net cash flow; discounting and capitalizing; estimating the cost of equity capital; adjusting a discount or capitalization rate for another economic income measure; weighted averages; excess earnings method of valuation; and handling discounts for lack of marketability and liquidity.

Subsequent chapters consider specific legal and economic contexts in which the cost of capital is a significant factor, including family law and estate planning; corporate restructuring; federal taxation; damage claims; intellectual property disputes; bankruptcy; appraisal and fairness cases; regulated industries; and ad valorem taxation. Finally, the book provides information for understanding and evaluating an expert's report, presenting frequently encountered errors in valuation reports and providing key questions to ask when examining witnesses in litigation.

Author Biography

Shannon Pratt, CFA, ARM, ABAR, FASA, MCBA, is a well-known authority in the field of business valuation and has written numerous books that articulate many of the concepts used in modern business valuation around the world. He is chairman and CEO of Shannon Pratt Valuations, Inc., in Portland, Oregon.

Roger Grabowski, FASA, is a managing director of Duff & Phelps LLC in their Chicago, Illinois, office. He has directed valuations of business, partial interests in businesses, intellectual property, intangible assets, real property, and machinery and equipment for various purposes, including tax (income and ad valorem) and financial reporting, mergers and acquisitions, formation of joint ventures, divestitures, and financing.

Table of Contents

Table of Contents
Foreword: Cost of Capital
Foreword: Family Law Perspective
Foreword: Insolvency Perspective
Table of Abbreviations

Part 1—Cost of Capital Basics
Chapter 1 Defining Cost of Capital
Chapter 2 Valuing Equity Versus Invested Capital
Chapter 3 Net Cash Flow: The Preferred Measure of Economic Income
Chapter 4 Discounting Versus Capitalizing
Chapter 5 Estimating the Cost of Equity Capital
Chapter 6 Components of Cost of Equity Capital
Chapter 7 Adjusting a Discount or Capitalization Rate for Other Measures of Economic Income
Chapter 8 Overall (Weighted Average) Cost of Capital
Chapter 9 How Cost of Capital Relates to the Excess Earnings Method of Valuation
Chapter 10 Handling Discounts for Lack of Marketability and Liquidity

Part II—Cost of a Capital in Specific Contexts
Chapter 11 Cost of Capital in Estate and Gift Tax Matters
Chapter 12 Cost of Capital Considerations in Corporate Restructuring and Other Federal Tax Matters
Chapter 13 Cost of Capital Included in Damage Claims for Lost Profits
Chapter 14 Cost of Capital in Intellectual Property Disputes
Chapter 15 Cost of Capital in Bankruptcy
Chapter 16 Cost of Capital in Appraisal and Fairness Cases
Chapter 17 Cost of Capital in Family Law Matters
Chapter 18 Cost of Capital in Ad Valorem Taxation
Chapter 19 Cost of Capital in Regulated Industries

PART III—Evaluating Experts
Chapter 20 Common Errors in Applying Cost of Capital
Chapter 21 Questions to Ask Business Valuation Experts

Appendix I: Bibliography
Appendix II: International Glossary of Business Valuation Terms