and L E93)46 - FSS€¦ · a n d L E93)46 R. James Alerding, ... CVA, CFE Stout Risius Ross, Inc. Stephen J. Bravo, CPA/ABV/PFS, ASA, ... MT, CPA/PFS, CVA Lyons & Seacrest

Financial Valuation Litigation Expert

Editor’sOutlookJim Hitchner

Greetings! Over the past few months,I’ve spent a great deal of time analyz-ing the new Duff and Phelps 2014 Val-uation Handbook. I’m particularly inter-ested in how to apply the new data andrelated methodology. Don Wisehartand I recently presented a webinarbased on our research and review, andI am sharing some of what we’velearned in this issue’s front-page arti-cle. I hope you will benefit from ourendeavors.

Rod Burkert poses some interest-ing observations regarding the use ofmultiple valuation methods. He dis-cusses the process of making individ-ual valuation methods more reconcil-able and compares that to weightingthese multiple methods.

Next up, Robert Reilly examinessome main factors that can influencean intellectual property valuation. Hethen summarizes those factors in aconcise chart.

As the 2014 AICPA Forensic andValuation Services Conference drawsnear (Nov. 9-11, New Orleans), StaceyUdell, who serves on its planning com-mittee, details two new hands-ontracks that will be offered. Both theHands-On Valuation Track andHands- On Forensic Track are gearedtoward those with fewer than fiveyears of experience. There is also a pre-

ViEWS And ToolS fRom lEAding ExPERTS on VAlUATion, foREnSiC/fRAUd And liTigATion SERViCES

FVLE Issue 51 October/November 2014 Page 1

and

Continued on page three

[email protected]

On October 8, Valuation Products andServices (VPS) presented a webinar:“20 Ways to Calculate the Cost of Equi-ty Capital: A Case Study, How toApply the New Data and Methodsfrom the Duff & Phelps 2014 ValuationHandbook.” Don Wisehart and JimHitchner were the presenters. Note:The transcript, PowerPoint slidessynched to the audio, and the hand-outs will soon be available at www.val-uation products.com.

This webinar focused on how toapply the new data and methods fromthe Duff & Phelps 2014 Valuation Hand-book – Guide to Cost of Capital (ValuationHandbook). As Hitchner said in thebeginning of the webinar, “This newpublication is, in many ways, a gamechanger.” This article explains why he

made that important statement. Duff & Phelps now provides us

with a wealth of data, so much so thatit can be overwhelming. Our task hereis to evaluate this data and help makeit more useable for valuation analysts(analysts). We have done this by apply-ing the data in a case study involving asmall company where the Center forResearch in Security Prices (CRSP)10th decile data is applicable as well asthe Duff & Phelps 25th portfolio cate-gory. Note: If you are unfamiliar withthe basic information in the ValuationHandbook, we recommend that you firstread the front page article “AnOverview of the Duff and Phelps 2014Valuation Handbook – Guide to Cost ofCapital,” FVLE Issue 49, June/July 2014,

EXPERTS in this IssueJim Hitchner

Editor’s Outlook.........................................................................................................1

Rod Burkerton Averaging Multiple Valuation Methods: Best Practice or Inviting Trouble?.............. 8

Robert Reillyon Qualitative Considerations in the Intellectual Property Valuation ......................... 10

Stacey Udellon AICPA Conference to Offer Hands-On Tracks for Newer FVS Analysts ................... 13

Jim Alerdingon Problems Arise when Appellate Court Awards ‘Equalization Payment’ ................. 16

Jeff Windhamwith a Case Law Update.......................................................................................... 18

Panel of Experts ....................................................................................................... 22

Cost of Capital Corner.............................................................................................. 25

Continued on next page

Twenty Ways to Calculate the Costof Equity Capital: A Case Study


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FINaNcIaL VaLuaTION - Front page, continuedwritten by Don Wisehart and JimHitchner.

The following information ispertinent to this case study:• The valuation date is August 1, 2014• We calculate the cost of equity capi-

tal (COEC) by using the build-upmodel (BUM) and the modified cap-ital asset pricing model (MCAPM)

• The risk-free rate is both normalizedand not normalized

• We present CRSP unadjusted, Duff &Phelps unadjusted and Duff &Phelps adjusted/recommended data

• We use the suggested adjustments inthe Valuation Handbook to convert theindustry risk premium (RPi) basedon the differences in the risk premi-um for the market (RPm), alsoreferred to as the equity risk premi-um (ERP)

• We use the same company-specificrisk premium (RPc) in all the calcu-lations

Let’s go through the case studythat results in the 20 different ways ofcalculating the cost of equity. Also, we Continued on next page

hope this case study and the resultscan be used by the analyst as a “cheatsheet” to allow for a fast review ofwhat data goes into each calculation.We also recommend that you gothrough each of the charts and whereyou see a footnote, go to page sevenand carefully read the end notes. If youspend a little time doing that, you’llsave yourself an awful lot of time in thelong run.

Chart 1Chart 1 presents only the BUM withthe risk-free rate plus RPm plus thesize premium (RPs) plus the RPi plusthe RPc. We also use CRSP data from1926 to 2013, and the Duff & Phelpsrisk premium data from 1963 to 2013.There are seven ways to use the CRSPdata and the Duff & Phelps data usingonly the BUM.

The risk-free rate (Rf) is not con-ditional, and we’re not normalizing therisk-free rate to 4.0 percent. As ofAugust 1, 2014, the spot risk-free ratewas 3.03 percent, which is used in allseven calculations using the BUM.

The next category is the RPm.The first column has the CRSP histori-cal RPm at 6.96 percent. The CRSP sup-ply-side RPm is 6.18 percent (secondcolumn). Since it has come out, thesupply-side RPm has always been lessthan the historical RPm. It’s possiblethat those two will converge at sometime in the future, but right nowthey’re different and have been formany years.

Moving across Chart 1, we havethe 6.96 percent historical RPm, whichis then adjusted for World War II inter-est rate bias of 1.12 percent. We havethe CRSP supply-side RPm at 6.18 per-cent, which is also adjusted for WorldWar II bias. With the four CRSPcolumns going down to the row WorldWar II bias, we’ve got four potentialcalculations. One is the historical RPmwith no adjustment for bias, one is thesupply-side RPm with no adjustment,and the other two are adjusted by 1.12percent.

Next we go to the size premium,which is RPs by itself for the CRSP

CRSP3

CRSP CRSP CRSP D&P4

D&P D&PHistorical

5Supply-Side

6Historical Supply-Side Historical

7Historical

8Risk

9

(1926-2013) (1926-2013) (1926-2013) (1926-2013) (1963-2013) (1963-2013) (1963-2013)

Risk-Free Rate (Rf)10

3.03 3.03 3.03 3.03 3.03 3.03 3.03

Market Premium (RPm) 6.96 6.18 6.96 6.18 4.90

WWII Bias11

(1.12) (1.12)

Size Premium (RPs or RPm+s)12

5.99 5.99 5.99 5.99 6.64 13.35

Risk Premium (RPm+c) 12.51

Industry Risk Premium (RPi)13

1.45 1.29 1.22 1.05 1.02

Company-Specific Risks (RPc)14

3.00 3.00 3.00 3.00 3.00 3.00 3.00

ke 20.43 19.49 19.08 18.13 18.59 19.38 18.54

chart 1

Duff & Phelps 2014 Valuation Handbook Cost of Equity Capital (ke) Case as of 8/1/141

Build-Up Method, ke = Rf + RPm + RPs + RPi + RPc Historical Unadjusted Data2


FINaNcIaL VaLuaTION - Front Page, continued

data; it’s also RPm plus RPs for theDuff & Phelps data (A Exhibits in theD&P risk premium data). The 10thdecile “in excess of CAPM” size premi-um using CRSP data is 5.99 percent forall four calculations: historical, supply-side, with and without World War IIbias.

Next we go to the RPi. In thiscase, it’s 1.45 percent in the first col-umn. That’s based on a 6.96 percentRPm. If you want to use the supply-side RPm, you must recompute the RPibased on the formula RPi = FIB(RPm) –RPm, where RPi is the industry riskpremium, FIB is the full informationbeta and RPm is the equity risk premi-um. The shortcut formula is RPi =FIB(RPm supply-side/RPm historical).The RPi using the supply-side RPm is1.45(6.18/6.96) = 1.29 percent.

When including World War IIbias you must recalculate the industryrisk premium using the RPm historicalfor the third column (6.96 percentminus 1.12 percent = 5.84 percent), andfor the fourth column (RPm supply-side 6.18 percent minus 1.12 percent =5.06 percent).

The RPI in the first column isstraight out of the book and is based onan historical RPm of 6.96 percent. Wethen use the above formula and comeup with the adjusted RPi based on theuse of a different RPm.

Now, let’s move to the Duff &Phelps risk premium data where thefifth and sixth columns are markedDuff & Phelps historical, and then thelast column is Duff & Phelps risk. Therisk-free rate for all three columns is3.03 percent, which is the spot rate andis not normalized. Let’s go to the fifthcolumn. The unconditional equity riskpremium (based on raw data) is 4.9percent. That’s from 1963 to 2013. Thisis not adjusted and is not the Duff &Phelps recommended RPm.

Then we add the size premiumfor the 25th portfolio category for Duff& Phelps, which is 6.64 percent (Bexhibits in the D&P risk premiumdata). That’s purely a size premium incolumn five. We looked at the meanand median averages as well as the Continued on next page

range for the eight measures of size.The range was 5.96 percent to 7.42 per-cent. The mean and median were 6.64percent and 6.57 percent, respectively.We went with the mean of 6.64 percent.

The RPi must be adjusted againbecause we’re using a 4.9 percent RPm,not 6.96 percent. So the foundation is6.96 percent. Again, any time you varyfrom that you’ve got to plug the newequity risk premium into the formulaabove– in this case 4.9 percent– tocome up with the new RPi.

Let’s go to the sixth column, Duff& Phelps historical. Now we’re usingthe RPm and size premium together.You don’t add a separate risk premiumfor the market and the size premium;it’s done together (A Exhibits in theD&P risk premium data). That’s 13.35percent. We looked at the mean andmedian averages as well as the rangefor the eight measures of size. Therange was 12.65 percent to 14.17 per-cent. The mean and median were 13.35percent and 13.42 percent, respectively.We went with the mean of 13.35 per-cent.

Notice here that we do not addthe industry risk premium when using

the sixth column, where the RPm andthe RPs are computed together,RP(m+s). A mistake we see is addingan industry risk premium to this data.You should not do that because youwould basically be counting beta riskmore than once. This is why we likethese charts as a so-called cheat sheet.For example, here it makes sure wedon’t add in the industry risk premiumand overstate the COEC.

The last category (seventh col-umn) is Duff & Phelps risk. This isnothing new; it’s been around a whileand it’s not size-based. The results tendto reflect size, but it’s based on threefundamental risk characteristics: thefive-year average operating margin,the coefficient of variation of the five-year operating margin, and the coeffi-cient of variation on the return on equi-ty (ROE) over a five-year period (DExhibits in the D&P risk premiumdata). That’s 12.51 percent.

We looked at the mean andmedian averages as well as the threemeasures of risk. The risk premiumswere as follows: operating margin(23rd portfolio at 13.27 percent), CV of



the operating margin (4th portfolio at12.12 percent), and CV of the ROE (2ndportfolio at 12.13 percent). The meanand median were 12.51 percent and12.13 percent, respectively. We wentwith the mean of 12.51 percent.

As is the case for column six, wedid not add an industry risk premiumsince it’s embedded in the overall riskpremium, RP(m+c). If you believe thatyour company is more risky than thecompanies in those three categories ofrisk: operating margin, CV of operat-ing margin, and CV of ROE, then youadd something in here. Otherwise youdon’t add anything in.

We added a 3.0 percent compa-ny-specific risk premium for each ofthe BUM calculations. So we’ve gotseven out of the 20 calculations hereand the difference, rounded, is 18 per-cent to 20 percent. There’s only a 2 per-cent difference between the high andthe low using all this data.

Chart 2Now let’s move to Chart 2, which is theMCAPM. Again, we’re using historicalunadjusted data; we’re using CRSP1926 to 2013 and Duff & Phelps 1963 to2013. Risk-free rates are unadjusted,not normalized.

Let’s present the CRSP data first.

For the first column, the risk-free ratesare unadjusted at 3.03 percent, and weuse the same RPm and RPs as in theBUM, 6.96 percent and 5.99 percent,respectively. We’ve got a beta, andfootnote 16 says there are some guide-line public companies that were reliedupon for the beta. We found a beta of1.3 percent and multiplied it times theRPm. We then add in company-specif-ic risk of 3 percent. The same thinghappens with the supply-side. We usethe same calculations except that thebeta is multiplied times a lower RPm of6.18 percent.

The beta in the third and thefourth column will be applied to theRPm minus the 1.12 percent for theWorld War II bias. You then add thesize premium, add the risk-free rate,and add the company-specific risk.

Let’s go to Duff & Phelps(columns five and six). We still calcu-late Duff & Phelps straight up in termsof what was used in the BUM. We usethe individual components of equityrisk premium, size premium (BExhibits), and company-specific risk.

The 1.3 beta we’re using here isan ordinary least squares beta. In theDuff & Phelps data they also have apresentation on the use of sum beta.The beta changes from 1.3 percent to

1.5 percent. Sum betas are almostalways higher than the regular OLSbeta for smaller businesses. The rangeof COEC is 19 percent to 21 percent,rounded.

Now we’re going to leave theunadjusted, unconditional, and not-normalized data inputs in Charts 1 and2. We’re going to move on to Chart 3which is the BUM and the MCAPMusing the normalized risk-free rate andthe Duff & Phelps recommended equi-ty risk premium.

Chart 3Take a look at Chart 3 on the next page.The normalized risk-free rate for allseven columns is 4.0 percent. The actu-al spot rate is 3.03 percent, but Duff &Phelps recommends that you normal-ize it to 4.0 percent. If the spot rate isabove 4.0 percent, they recommendthat you use the spot rate. Below 4.0percent, they recommend that you use4.0 percent. The RPm is also the samefor all the columns except columnsfour and five. In columns four and fivethe RPm is embedded in the overallrisk premium, RP(m+s) and RP(m+c).

Let’s start with the CRSP data(columns one and two). In the first col-umn we’ve got a BUM and the risk-free

CRSP CRSP CRSP CRSP D&P D&PHistorical Supply-Side Historical Supply-Side D&P Historical D&P Historical15

(1926-2013) (1926-2013) (1926-2013) (1926-2013) (1963-2013) (1963-2013)

Risk-Free Rate (Rf) 3.03 3.03 3.03 3.03 3.03 3.03

Market Premium (RPm) 6.96 6.18 6.96 6.18 4.90 4.90

WWII Bias (1.12) (1.12)

Size Premium (RPs) 5.99 5.99 5.99 5.99 6.64 6.64

Beta16 1.30 1.30 1.30 1.30 1.30 1.50

Company-Specific Risks (RPc) 3.00 3.00 3.00 3.00 3.00 3.00

ke 21.07 20.05 19.61 18.60 19.04 20.02

chart 2

MCAPM Method, ke = Rf + (b x RPm) + RPs + RPc Historical Unadjusted Data2




Phelps recommended ERP of 5.0 per-cent. The last column is based on a sumbeta. The range of COEC in Chart 3 is19 percent to 21 percent, rounded.

SummaryFor all three charts, the overall differ-ence (rounded) is only 18 percent to 21percent. The ranges of COEC (round-ed) are as follows:

Chart 1 (unadjusted data; BUM)18-20 percent

Chart 2 (unadjusted data; MCAPM) 19-21 percent

Chart 3 (Adjusted normalized data; BUM and MCAPM)19-21 percent

all 20 Ways18-21 percent

rate is now 4.0 percent, because that’snormalized. We’ll use the Duff &Phelps recommended equity risk pre-mium, which at the valuation date of8/1/14 was 5.0 percent; then we’ll usethe size premium from the 10th decileof the CRSP data. We’ll run the indus-try risk premium at 1.04 percent basedon the change in the RPm from 6.96percent to 5.0 percent. We’ve got torerun it because the industry risk pre-mium is based on 6.96 percent. We’reusing 5.0 percent, the recommendedDuff & Phelps number. We’ve got toredo it with the formula previouslypresented. We then add the company-specific risk.

The second column is theMCAPM. We multiply the 1.3 betatimes the equity risk premium of 5 per-cent, add a size premium from theCRSP 10th decile and then add thecompany-specific risk.

In the third, sixth and seventhcolumns the calculations are the sameas in the first two columns except thesize premium is from the D&P 25thsize category vs. the CRSP 10th decile.

The fourth column is the com-

bined RP(m+s) from the A Exhibits ofDuff & Phelps. The fifth column is thecombined RP(m+c) from the D Exhibitsof Duff & Phelps. The normalized risk-free rate is 4.0 percent; however, if therecommended ERP is different fromthe Duff & Phelps historical, then anERP adjustment needs to be made.Here it is 0.1 percent, which is the 5.0percent recommended minus the 4.9percent historical/unadjusted.

This is the lowest ERP adjust-ment in recent times. It’s only a tenth ofa point; you probably think it’s almostnot worth doing. But sometimes it is,as there have been times historicallywhere this number is much larger than0.1 percent.

According to Duff & Phelps, youadd the ERP adjustment to the build-up method when you’re using the AExhibits, RP(m+s), where the m is theRPm and the s is the RPs, and whenyou’re using the D Exhibits, RP(m+c),where the m is the RPm and the c is thecompany-specific risk.

The sixth column is theMCAPM, and there’s no ERP adjust-ment because we’re using the Duff &

CRSP CRSP D&P D&P D&P D&P D&PHistorical Historical Historical Historical Risk Historical Historical

(1926-2013) (1926-2013) (1963-2013) (1963-2013) (1963-2013) (1963-2013) (1963-2013)

Risk-Free Rate (Rf)17

4.00 4.00 4.00 4.00 4.00 4.00 4.00

Market Premium (RPm)18

5.00 5.00 5.00 5.00 5.00

ERP Adjustment19

.10 .10

Size Premium (RPs or RPm+s) 5.99 5.99 6.64 13.35 6.64 6.64

Risk Premium (RPm+c) 12.51

Industry Risk Premium (RPi) 1.04 1.04

Beta20

1.30 1.30 1.50

Company-Specific Risks (RPc) 3.00 3.00 3.00 3.00 3.00 3.00 3.00

ke 19.03 19.49 19.68 20.45 19.61 20.14 21.14

chart 3

Build-Up Method, ke = Rf + RPm + RPs + RPi + RPc and MCAPM Method, ke = Rf + (b x RPm) + RPs + RPc

Adjusted Data (Normalized Rf and D&P Recommended ERP/RPm)

Endnotes on next page c



1 All risk premium data from the Duff & Phelps 2014 Valuation Handbook: Guide to Cost of Capital, copyright © 2014, Duff & Phelps, LLC. All rights reserved.Used with permission. www.bvmarketdata.com

2 All data on Charts 1 and 2 are unadjusted data, i.e., the spot risk-free rate is not normalized and the D&P recommended equity risk premium (ERP) and ERPadjustment are not applied.

3 Center for Research in Security Prices CRSP Deciles Size Premia Exhibits include the size premia and other data previously published in the Ibbotson SBBI Valuation Yearbook.

4 Duff & Phelps Risk Premium Report Exhibits includes the size premia and other data previously published in the Duff & Phelps Risk Premium Report.5 This is the long-term historical realized ERP from the period 1926 to 2013, which is the same starting point in the old Ibbotson SBBI Valuation Yearbook.6 This is the long-term supply-side realized ERP from the period 1926 to 2013. The supply-side adjustment removes the observed growth in price-to-earnings

ratios, which have occurred primarily in the last 25 years. This data was previously published in the Ibbotson SBBI Valuation Yearbook.7 This is the historical realized ERP from 1963 to 2013, which is the same as the starting point in the old Duff & Phelps Risk Premium Report.8 Based on RPm+s 25th portfolio, which is the combined risk premium over the risk-free rate that includes RPm and RPs. RPI is not included as RPm+s includes

the beta risk of the 25th portfolio.9 Risk is based on the D Exhibits in the Valuation Handbook and is measured using the five-year average operating margin, coefficient of variation (CV) of the aver-

age operating margin and the CV of the five-year average return on equity. The initial measurements are not size-based although there is a relationship betweenthe three risk factors and size. In this example, RPm+c is the risk premium over the risk-free rate for the subject company using the average of the 23rd portfoliofor the average operating margin, the 4th portfolio for the CV of the average operating margin, and the 2nd portfolio for the CV of the average return on equity.Also, RPi is not added in. RPc is added in if the analyst believes that the subject company has additional risk not captured in the risk portfolios.

10 Risk-free rate based on the 20-year Treasury bond as of August 1, 2014. This is the spot rate and not the normalized rate recommended by D&P.11 WWII bias is World War II interest rate bias due to government-imposed stability in the U.S. government bond interest rates from 1942 to 1951. This caused high

average realized return premiums that some perceive as overstating the overall ERP from 1926 to 2013.12 For the CRSP historical and supply-side calculations (with and without WWII bias), we are relying on the 10th decile size premium. For the D&P size premium,

we are using the 25th size portfolio for RPs, which is the size premium (in excess of CAPM) on a standalone basis and RPm+s, which is the combined risk premi-um over the risk-free rate that includes RPm and RPs.

13 The industry risk premium is adjusted based on the selection of the ERP and using the formula RPi = FIB(ERP) – ERP where FIB is the ordinary least squares(OLS) full information beta. For the calculations that include the WWII bias, the RPi is based on (RPm – WWII bias).

14 This is based on adjustments for risk such as differences in risk between a private company and guideline public companies (if appropriate), risk in net cash flowsand potentially biased projections, and other risk factors.

15 This calculation uses a sum beta (lagged beta) which helps to offset the effect of more infrequent trading of smaller stocks.16 The beta of 1.3 is based on a smaller group of guideline public company betas, i.e., smaller than the number of companies in the RPi calculation. That is why the

1.3 beta does not tie to the formula for calculating the RPi. For the calculations that include the WWII bias, the beta is multiplied by (RPm – WWII bias).17 Risk-free rate based on the normalized 20-year Treasury bond rate of 4.00%. This is the normalized rate recommended by D&P when the risk-free rate is below

4.00%. Above 4.00%, D&P recommends using the spot rate.18 D&P’s recommended conditional ERP from February 28, 2013 to the August 1, 2014 valuation date.19 The D&P ERP adjustment accounts for the difference in the historical D&P ERP of 4.9% vs. their current recommended ERP of 5.00%.20 This calculation uses an OLS beta of 1.3 and a sum beta (lagged beta) of 1.5.

20 Ways to calculate the cost of Equity capital: a case Study how to apply the New Data and Methods from the Duff & Phelps 2014 Valuation Handbook

Want to learn more about this topic?

Our archived webinar package will soon be available for purchase!

Jim Hitchner, CPA/ABV/CFF, ASA and Don Wisehart, CPA/ABV/CFF, ASA, CVA, MST

guide you through a new case study that shows 20 ways to calculate the cost of equity capital

using the new Duff & Phelps 2014 Valuation Handbook. You will learn how to determine, support, and present

on the cost of equity capital. This session also evaluates the tools, resources, and methods available

to determine the cost of equity capital and how to reconcile the results into a supportable conclusion.

If you missed one of the webinars in the VPS StraightTalk Series, you can order an archived webinar package.

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showing the audio synced to the slide presentation in real time, a transcript, and any supplemental handouts.

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http://www.valuationproducts.com/webinarspast.html


FINaNcIaL VaLuaTION - Valuation methods

Sometimes it’s still the basics that wewrestle with in our valuation engage-ments. And whether or not to averagemultiple valuation methods–methodsthat we consider sound and which wereasonably apply to the specific factsand circumstance–falls into that camp.

For the sake of argument, let’sassume we are valuing a smallish-sized operating business. We’ll eschewthe asset approach–for good reasonsthat we discuss in our report, of course–leaving us with the income and mar-ket approaches. Still, during the courseof our assignment we’ll take severalsteps that “blend” the informationalvalue of the data we gather to applythese two approaches. For example:• We generally employ a simple or

weighted averaging convention ofnormalized earnings for the capital-ized cash flow method.

• We might average models that useMorningstar (historical and supply-side) and Duff & Phelps (condition-al and unconditional) equity riskpremium data when we develop adiscount rate for the CCF or DCFmethods.1

• We look at measures of central ten-dency (median, mean, harmonicmean) when we estimate multiplesusing the guideline transaction andguideline public company methods.

• We consider more than one methodto estimate a discount for lack ofmarketability so we can triangulatein on that reduction in value.

These steps are designed, hopefully, todrive our income and market approachresults closer together. So on one hand,does the process of making valuation

methods more reconcilable make aver-aging multiple methods inappropriateor irrelevant? Or, on the other hand, isit disingenuous to inject varioussmoothing and averaging conventionsthroughout the valuation process (seeabove), but then draw a line when itcomes to weighting multiple methods… as if to say, “Whoa, it’s way too sub-jective to do something like that”?

Let’s make another simplifyingassumption. Assume we are not talk-ing about indications of value for theincome approach (CCF or DCF) andmarket approach (guideline transac-tions) of $3 million and $5 million. Per-sonally, I believe this is the circum-stance that Section 7 of Revenue Ruling59-60 wants to preclude. And givensuch a large disparity, it is likely thatour analysis has some error we mustcorrect or some disconnect we mustresolve.

But what if the valuation resultswere closer – say $4 million and $4.5million? Appraisers might argue overthe subjectivity of weighting theresults: 50/50, 60/40, 80/20.2 But isn’t ittrue that if we choose just one method,our weights are 100/0? Is that any moredefensible? Shouldn’t the information-al value of a reasonably developedalternative method be given someweight?

If we are going to choose onemethod, the next step usually involvesplaying the corroboration or sanity-check card. We say that we consideredother methods, but believe method X ismore reliable and method Y providescorroboration or a sanity check. Butdoes a more reliable $4 million methodresult corroborate a $4.5 million

method result? Or vice versa? Or doesthe expected investment/fair/fair mar-ket value lie somewhere between thosebookends?3

Note that if we were helping aclient buy/sell a business, we would belikely (even happy) to express ourresults as a range of $4-$4.5 million. Wemight even be comfortable saying it’sprobable that the (investment or fairmarket) value is neither the low num-ber nor the high number – that the(investment or fair market) value isprobably somewhere in between – nomatter how much confidence we hadin either the income approach or themarket approach.

No, the problem arises when weneed to come up with a single numberestimate of (fair or fair market) valuefor litigation or estate/gift purposes. Inthat case, the no-averagers are going topick $4 million (even though the infor-mational value of the other methodindicates it is likely somewhere northof that figure) or $4.5 million (eventhough the informational value of the

Averaging Multiple Valuation Methods: Best Practice or Inviting Trouble?

expertTIPIs it disingenuous to inject various

smoothing and averaging conven-

tions throughout the valuation

process, but then draw a line when

it comes to weighting multiple

methods?


rod P. Burkert,CPA/ABV, CVA

Burkert Valuation Advisors, LLC Madison, SD

[email protected]


buRkERT, continued

other method indicates it is likelysomewhere south of that amount).

When it comes to averaging mul-tiple valuation methods, we can allpoint to the relevant excerpt from IRSRevenue Ruling 59-60:

Sec. 7. average of Factors.Because valuations cannot bemade on the basis of a prescribedformula, there is no means where-by the various applicable factors ina particular case can be assignedmathematical weights in derivingthe fair market value. For this rea-son, no useful purpose is served bytaking an average of several factors(for example, book value, capital-ized earnings and capitalized divi-dends) and basing the valuation onthe result. Such a process excludesactive consideration of other perti-nent factors, and the end resultcannot be supported by a realisticapplication of the significant factsin the case except by mere chance.

Many appraisers have taken this tomean don’t average multiple methods.Ever. But if/when we average multiple,reasonably close methods – eitherexplicitly with numeric weights orimplicitly with informed judgment –aren’t we, in fact, actively consideringother pertinent factors so that the endresult can be supported by a realistic appli-cation of the significant facts in the case?Something we wouldn’t be doing –something we would be missing – ifwe didn’t average? For more informa-tion on weighting values, see FVLEIssue 20, Aug./Sept. 2009, “CommonSense Issues in Weighting Values.” c1 Consider that the equity risk premium, itself, is an aver-

age of 88 years of historical data from Morningstar and51 years of the same from Duff & Phelps.

2 In my experience, explicit and implicit weighting gener-ally focuses on factors like the veracity of the financialstatements, the number and size of normalizing adjust-ments, management’s ex post track record of producingaccurate projections, the number of guideline transac-tions and transactions found, the recency of thoseguideline transactions, the comparability of those publicguideline companies, etc.

3 I know that many appraisers believe the incomeapproach is generally more reliable than the marketapproach. While the point of this article is not to debatethe reliability of different methods, it does play out whenweighting methods are discussed. See the footnoteabove.

The American Society of Appraisers (ASA) announces the re-launch of the

Business Valuation Challenge Exam (Challenge Exam) for accreditation.

One of the requirements for advancement to Accredited Member (AM)

and Accredited Senior Appraiser (ASA) is completion of four 27-hour

Principles of Valuation (POV) courses, including a three-hour exam at the

conclusion of each.

The Business Valuation Committee and the Board of Examiners of ASA

recognize that there are many experienced business valuation profession-

als that already have mastered the competencies taught in the POV

courses.

The Challenge Exam is geared toward those professionals who have

more than 10,000 hours (5 years) of business valuation engagement

experience and who stay abreast of the ever-changing landscape of the

profession and is intended to test a wealth of knowledge based on the

topics covered in the POV courses.

The POV courses are:

• BV201: Introduction to Business Valuation & the Market Approach

• BV202: The Income Approach

• BV203: The Asset Approach, Reconciliation of Values, Valuation

Discounts and Premiums, Report Writing

• BV204: Advanced Topics-Pass Through Entities, Intangible Assets,

Complex Capital Structures, Debt and Preferred Stock.

With 260 total questions, the exam is administered in two 4-hour mod-

ules to be taken on the same day. The Challenge Exam is for those who

truly have already mastered the competencies taught in the POV courses

and that would satisfy all other requirements for advancement to AM or

ASA but who have not yet completed the coursework.

To register or to learn more about the Challenge Exam, visit

http://www.appraisers.org/Product-Catalog/Product?ID=7599 or

contact Joyce Johnson at (703) 733-2123 or [email protected].

ASA Re-Launches

Business Valuation Challenge Exam


FINaNcIaL VaLuaTION - Intellectual Property Valuation

introduCtionLegal counsel often retain specializedvaluation analysts (analysts) to valuetheir client’s intellectual property (IP)for various litigation-related reasons.These reasons often include breach ofcontract claims (including breach ofdevelopment, commercialization,license, or joint venture agreements)and tort claims (including infringe-ment, tortious interference with busi-ness opportunity, or breach of fiduci-ary duty claims). These litigation-relat-ed reasons also include family-law dis-putes, tax disputes (including gift andestate tax, income tax, and property taxconflicts), and bankruptcy disputes(including creditor protection, solven-cy and insolvency, and reasonablyequivalent value issues). In addition,legal counsel may retain analysts tovalue client IP for various transaction,taxation, financing, financial account-ing, or corporate governance purposes.This discussion summarizes many ofthe factors that the analyst considers inthe IP valuation process.

Depending on the legal counsel’sassignment, analysts often define IPbroadly to include both (1) patents,trademarks, copyrights, and tradesecrets, and (2) associated intangibleassets. Such IP typically creates propri-etary knowledge and processes for thecorporate owner/operator. This propri-etary knowledge or process may beeither developed by or purchased bythe corporate owner/operator. In orderfor an IP to have measurable value, itshould provide, or have the potentialto provide, a competitive advantage ora product differentiation.

For the various litigation andother reasons mentioned above, legalcounsel may retain the analyst to valuethe following types of IP:

• Patents• Patent applications• Patentable inventions• Trade secrets• Know-how• Proprietary processes• Proprietary product recipes or for-

mulae• Confidential information• Copyrights on technical materials

such as computer software, technicalmanuals, and automated databases

• Trademarks, trade names, servicemarks, service names, trade dress

• Domain names

The analyst’s valuation considerationssummarized herein are relevant bothwhen the counsel’s client owns orinbound/outbound licenses the subjectIP.

underStanding the SuBjeCtintelleCtual ProPertyattriButeSBefore performing any quantitativevaluation procedures, the analyst willendeavor to understand the attributesof the subject IP. The analyst may qual-itatively assess the subject IP attributesby considering the following ques-tions:1. What are the property rights relat-

ed to the IP? What are the function-al attributes of the IP?

2. What are the operational or eco-nomic benefits of the IP to its cur-rent owner/operator? Will thoseoperational or economic benefits beany different if the IP is in thehands of a third-party owner/oper-ator?

3. What is the current utility of the IP?How will this utility change inresponse to changes in the relevantmarket conditions? How will this

utility change over time? Whatindustry, competitive, economic, ortechnological factors will cause theIP utility to change over time?

4. Is the IP typically owned or operat-ed as a stand-alone asset? Or is theIP typically owned or operated as(a) part of a bundle with other tan-gible assets or intangible assets or(b) part of a going-concern businessenterprise?

5. Does the IP utility (however meas-ured) depend on the operation oftangible assets or other intangibleassets or the operation of a businessenterprise?

6. What is the IP’s highest and best use(HABU)?

7. How does the IP affect the incomeof the owner/operator? This inquirymay include consideration of allaspects of the owner/operator’s rev-enue, expense, and investments.


expertTIPLegal counsel may retain an

analyst to value their client’s IP

for various litigation or other

controversy-related purposes.

In addition, legal counsel may ask

the analyst to value the client’s IP

for various transaction, taxation,

financing, or other purposes.

Qualitative Considerationsin the intellectual PropertyValuation

roBert F. reilly, CPa

Willamette Management AssociatesChicago, IL

[email protected]


FINaNcIaL VaLuaTION - Intellectual Property Valuation, continued

8. How does the IP affect the risk(both operational risk and financialrisk) of the owner/operator?

9. How does the IP affect the compet-itive strengths, weaknesses, oppor-tunities, and threats of theowner/operator?

10.Where does the IP fall within itsown life cycle, the overall life cycleof the owner/operator, the life cycleof the owner/operator industry, andthe technology life cycle of bothcompeting IP and substitute IP?

Such inquiries give the analyst a start-ing point for understanding (1) the useand function of the subject IP and (2)the attributes that create IP value. Thisunderstanding will allow the analystto select the most appropriate IP valu-ation approaches, methods, and proce-dures.

FaCtorS that inFluenCe theintelleCtual ProPerty ValueNumerous factors may affect the sub-ject IP value. Industry, product, andservice considerations may provide awide range of positive and negativeinfluences on the IP value. To theextent possible, the analyst will quali-tatively or quantitatively assess each ofthese influence considerations. table 1on the following page presents some ofthe attributes that the analyst normallyconsiders in the IP valuation processand also indicates how these attributesmay influence the subject IP value.

Not all of the Table 1 attributesapply to the valuation of every IP, andeach attribute does not have an equalinfluence on the IP value. However, theanalyst will typically consider each ofthese attributes as part of the IP valua-tion analysis. The analyst may docu-ment each attribute separately in thevaluation analysis working papers, orthe analyst may assess these attributescollectively as one component of the IPvaluation analysis. These considera-tions allow the analyst to assess theinfluence of these attributes, eitherpositive or negative, on the subject IPvalue.

Some of the other factors that the

analyst normally considers in the valu-ation process include (1) the legalrights associated with the subject IP, (2) the industry in which the IP is used,(3) the economic characteristics of theIP, (4) the reliance of the IP owner/operator on tangible assets or otherintangible assets, and (5) the expectedimpact of regulatory policies or otherexternal factors on the commercial via-bility or marketability of the subject IP.

SummaryLegal counsel may retain an analyst tovalue their client’s IP for various litiga-tion or other controversy-related pur-

poses. In addition, legal counsel mayask the analyst to value the client’s IPfor various transaction, taxation,financing, or other purposes. In suchinstances, the analyst will consider thepurpose of the counsel’s valuationassignment as well as the relevant fac-tors specific to the subject IP. In suchvaluation assignments, the analyst willperform these qualitative proceduresbefore performing the quantitative val-uation analyses. This discussion con-sidered the types of IP that may be ana-lyzed, the typical attributes of the IP,and the typical factors that the analystevaluates when assessing IP value. c

Table 1 on next page


attributES that iNfluENcE iNtEllEctual ProPErty ValuE

Influence on the Subject Intellectual Property Value

1 Age - absolute Newly created, state-of-the-art IP Long-established, dated IP

2 Age - relative Newer than competing IP Older than competing IP

3 Use - consistency IP proven or used consistently IP unproven or used inconsistently on on products and services products and services

4 Use - specificity IP can be used on a broad range IP can be used only on a narrow range of products and services of products and services

5 Use - industry IP can be used in a wide range IP can be used only in a narrowof industries range of industries

6 Potential for expansion Unrestricted ability to use IP on new Restricted ability to use IP on new or different products and services or different products and services

7 Potential for exploitation Unrestricted ability to license IP Restricted ability to license IP into into new industries and uses new industries and uses

8 Proven use IP has proven application IP does not have proven application

9 Proven exploitation IP has been commercially licensed IP has not been commercially licensed

10 Profitability - absolute Profit margins or investment returns on Profit margins or investment returns on related products and services higher related products and services lower than industry average than industry average

11 Profitability - relative Profit margins or investment returns Profit margins or investment returnson related products and services on related products and services higher than competing IP lower than competing IP

12 Expense of continued development Low cost to maintain the IP as High cost to maintain the IP as state-of-the-art state-of-the-art

13 Expense of commercialization Low cost of bringing the IP to High cost of bringing the IP tocommercial exploitation commercial exploitation

14 Means of commercialization Numerous means available to Few means available to commercialize the IP commercialize the IP

15 Market share - absolute market Products and services using the IP Products and services using the IPshare have high market share have low market share

16 Market share - relative to Products and services using the IP Products and services using the IPcompeting IP have higher share than competing IP have lower market share than competing IP

17 Market potential - absolute Products and services using the IP Products and services using the IPare in an expanding market are in a contracting market

18 Market potential - relative Market for products and services using Market for products and services usingIP expanding faster than competing IP IP expanding slower than competing IP

19 Competition Little or no competition for the IP Considerable established competitionfor the IP

20 Perceived demand Perceived currently unfilled need for Little or no perceived need for the IPthe IP

ITEM ATTRIBUTES POSITIVE NEgATIVE

TABLE 1


FINaNcIaL VaLuaTION - Professional Development

The Bureau of Labor Statistics predicts13 percent growth in accounting jobsfrom 2012 to 2022.1 The AmericanInstitute of Certified Public Account-ants (AICPA) research indicates anexpected focus on growth and talentmanagement, particularly in advisoryand specialty areas.2 According to arecent article in its Journal of Accountan-cy, “Businesses as a whole are expectedto find it increasingly difficult toattract, retain, and develop high-quali-ty talent.”3

The ACIPA website points out,“Continuing education and lifelonglearning are crucial for CPAs who wantto stay ahead of the curve, enhancingtheir competencies and integratinglearning and working experiences.”4 Atthe 2013 AICPA E.D.G.E. (Evolve. Dis-tinguish. Grow. Engage.) Conference,5

the top seven issues facing youngCPAs were identified as:1. Information overload2. Work/life balance3. Generational issues and communi-

cations4. Developing networking skills5. Keeping up with technology6. Finding career guidance7. Understanding social media bene-

fits6

The AICPA Task Force on the Future ofLearning recently discussed trends inCPA learning and professional devel-opment. Three of its recommenda-tions were:1. Innovate and experiment – use tech-

nology to enhance learning experi-ences

2. Ignite a passion for learning – makelearning engaging

3. Make learning personal – focus onthe individuals’ needs7

It is often difficult to make time toproperly train younger staff, so theyoften learn through on-the-job train-ing. When I started working in thebusiness valuation field, I was givenreports to proofread. Then, I was

asked to perform the financial andindustry analysis of a company I knewlittle about. Eventually, I was writingthe whole report. To determine a value,I did what I thought seemed reason-able (as an inexperienced staff person)and learned based on adjustmentsmade by the partner. There was noofficial training for at least the firstyear.

In the business valuation indus-try, on-the-job training is common. It isoften the only form of education for thefirst six months to two years. Largerfirms offer in-house training specific tobusiness valuation/litigation support/forensic, but smaller firms may nothave this option. Larger firms are ableto provide internal training and dis-tribute the costs over more individuals8

compared to smaller organizations.9

Training offered by larger firms isoften done for professionals at all lev-els of experience.

There are many continuing edu-cation offerings available through statesocieties, private organizations/associ-ations, and the AICPA. Barriers ofteninclude financial considerations, timeconstraints, family commitments, andlack of support by employers. Techno-logical advances have allowed us toobtain CPE without leaving our desksthrough the use of webinars and evenallowing us to virtually attend confer-ences.10

To help address this lack of for-mal training, the AICPA is introducingtwo new “NextGen” hands-on tracksat its 2014 Forensic and Valuation Serv-ices Conference (Nov. 9-11, NewOrleans),11 primarily geared towardsthose new (fewer than five years expe-rience) in the field. The hands-on Val-uation track is offering a detailed casestudy that will be developed from startto finish. Presenters will be given acase study and will work together toarrive at an ultimate conclusion. Par-ticipants will discuss their thoughtprocesses and learn tangible skills thatcan be put to work right away.

In this new hands-on valuationtrack, the AICPA is trying to assistfirms in providing the essential train-ing needed by emerging professionals.By offering this training during anational conference, we hope to pro-vide emerging professionals with anopportunity to meet people at otherfirms so they can build a network ofresources. In addition, participants inthis track will have interaction withAICPA Business Valuation Hall ofFame members, Financial Valuation andLitigation Expert (FVLE) Panel ofExperts members, and other qualifiedprofessionals.

Participants should attend eachsession in the track because the ses-sions build on each other. The follow-ing is an overview of what we are plan-ning:1. Financial Statement analysis –

Kevin Yeanoplos and BethanyHearn will co-present this session.Participants will learn about thevalue and process of financial state-ment analysis and gain knowledgeof what the financial ratios meanand how they affect the valuation of

AICPA Conference to Offer Hands-On Tracks for

‘NextGen’ Valuation Analysts and Forensic Accountants


expertTIPAlong with training, attending a

national conference or meeting

provides invaluable opportunities

for networking.

StaCey udell, CPA/ABV/CFF, ASA, CVA

Gold Gerstein Group LLCMoorestown, NJ

[email protected]


FINaNcIaL VaLuaTION - Professional Development, continued

a company. Participants will be ableto assist and ask questions as thepresenters perform their analysis ofthe subject company during the ses-sion.

2. management interviews – Whileyounger staff may not be conductinginterviews on their own right away,they are often asked to assist seniorstaff in generating questions early intheir careers. This session will intro-duce participants to the manage-ment interview process includingexamples of “good questions” and“bad questions.” Participants willbe asked to join in and developquestions of their own to be utilizedin the case study, led by NathanDiNatale and Jason MacMorran.

3. industry and economic research –Participants will learn how to applythis research in the valuationprocess. Jan Davis will provideattendees with resources andexplain the differences between freeand fee-based sources.

4. Valuation approaches – In threedifferent sessions, attendees willexplore the selection and applicationof the appropriate income and mar-ket approaches for the case study.In the market approach session, par-ticipants will be walked through theapplication of both the guidelinepublic company method and thecomparable transactions method.These sessions will be taught byHarold Martin, Gary Trugman,Linda Trugman, and RosanneAumiller.

5. reconciliation and asset approachdiscussion – Neil Beaton and I willco-present this session, which willfocus on the application of the assetapproach to the case study as well ashow to reconcile values from theother methods utilized.

6. report Writing – The case studywill be brought to its conclusionwith a discussion of report writingand the application (and quantifica-tion) of appropriate discounts/pre-miums. Participants will learn aboutreport writing requirements relatingto the case study as well as other

common valuation purposes. Can-dice Bassell and Rod Burkert willdiscuss the most efficient and effec-tive report layouts depending on theintended users of the report, as wellas how to use valuation schedulesto your advantage.

7. Wrapping up and ask the experts –The last session in this track willwalk participants through the deliv-ery of their report and managingclients’ expectations. This is also anincredible opportunity to ask thepresenters questions regarding thecase study.

The hands-on Forensic track istaking a slightly different approach.The AICPA Certified in FinancialForensics (CFF) Body of Knowledgespans multiple specialty areas.12

Because of the variety within the foren-sic accounting area, the Forensic Trackdeveloped five sessions addressingforensic accounting concepts, method-ologies, procedures and tools in case-simulation sessions within commontypes of engagements. The ForensicTrack will include sessions on:1. Fraud investigation using excel

data analysis - This two-part ses-sion will introduce and demonstratepowerful analysis tools availablewithin Microsoft Excel. The sessionswill be hands-on, allowing attendeesto learn and practice the data analy-sis skills using real-life case data.Participants will be taught Excelshortcuts, tips and tricks and how toimport data from various sourcesand perform validation steps. Addi-tionally, attendees will learn how toutilize basic data analysis tools withExcel.

2. Commercial damages – In this busi-ness damages case study, a scenario,facts and assumptions, and discov-ery will be provided. A plaintiff’sside and a defendant’s side will beassigned; each will develop dam-ages, prepare for, and present opin-ions in a deposition. The final por-tion includes a review and critiqueby the participant of a Rule 26 reportprepared in connection with thiscase.

3. individual damages – This two-part session will cover calculationsfor a personal injury case. Topicsinclude the accountant’s role inmeasuring damages involving indi-viduals, legal concepts, and termi-nology most often encountered; pro-cedures to be performed in a person-al injury engagement; and a samplecase to illustrate the calculation ofdamages for individuals.

4. divorce/Family law – Participantswill perform common procedures inworking up a divorce case analysisfrom start to finish.

5. internal investigations (regulatoryviolations) – In this two-part consec-utive session series, participants willexperience a real-time internalinvestigation simulation. Groupswill form a plan and conduct aninvestigation over a wide array ofconcerns including corruption,bribery, fraud, reporting compli-ance, etc. Each team will be given anevaluation of their results by the vir-tual client.

6. reporting – In this capstone session,presenters from each of the afore-mentioned courses will participatein a panel where the focus is on theformat and mode with which theresults of the forensic accountant’swork is reported.

On a similar note, Kevin Yeanop-los and I are co-presenting at a pre-conference “Practice ManagementWorkshop” on Sunday morning. Inthis three-hour interactive session, wewill discuss ways to achieve a “work-life balance,” especially when given allof the technological and theoreticaladvances in our field. Attendees willhave an opportunity to hear from JimAlerding, Neil Beaton, Nancy Fannon,Bethany Hearn, Jim Hitchner, and RonSeigneur, along with numerous others.We will also discuss the differences,advantages, and disadvantages inworking at small firms versus largefirms. Finally, we will discuss how towork less and earn more money byperforming premium services. Thisunique workshop gives you access, in a



FINaNcIaL VaLuaTION - Professional Development, continued

relatively informal environment, tosome of the big names in the industry.

Some characteristics it takes tosucceed in our field are strategic think-ing and having a supporting network.13

Attending a conference is one of thebest ways to enhance these characteris-tics.

In February 2012, the AICPA’swebsite published a top 10 list ofthings that young CPAs should focuson for their careers (see Sidebar at rightfor abbreviated list).14 The 2014 AICPAForensic and Valuation Services Con-ference—particularly the Hands-OnTracks—is a great place to developmany of these skills. c

Note: Stacey Udell is on the AICPA 2014Forensic and Valuation Services Confer-ence Planning Committee.

1 http://www.journalofaccountancy.com/news/201410140.htm

2 Ibid.3 Ibid.4 http://www.aicpa.org/interestareas/youngcpanetwork/

resources/career/pages/lifelonglearningsucceedinginto-dayschallengingbusinessenvironment.aspx

5 Designed for CPAs and practitioners in public account-ing, business, and industry with three to fifteen yearsof accounting experience.

6 http://www.aicpa.org/interestareas/youngcpanetwork/resources/professionalissues/pages/top7issuesfacingy-oungcpas.aspx

7 http://journalofaccountancy.com/News/201410139.htm8 Laurie Miller, “Workplace Learning Remains a Key

Organizational Investment,” October 30, 2013, <http://www.astd.org/Publications/Magazines/TD/TD-Archive/2013/11/Workplace-Learning-Remains-a-Key-Organizational-Investment?mktcops=c.learning-and-development~c.learning-technologies&mktcois=c.trends~c.e-learning~c.mobile-learning~c.measuring-and-evaluating~c.training-and-development~c.informal-learning> (accessed May 27, 2014)

9 With fewer than 500 employees.10 The AICPA, for example, provides a virtual attendance

option where participants can attend the conferenceremotely, in real time.

11 http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/BusinessValuationandLitigationServices/PRDOVR~PC-FVC/PC-FVC.jsp

12 To learn more, visit http://www.cpa2biz.com/AST/Main/CPA2BIZ_Primary/BusinessValuationandLitiga-tionServices/PRDOVR~PC-FVC/PC-FVC.jsp

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14 http://www.aicpa.org/interestareas/youngcpanetwork/resources/career/pages/top10thingsforyourcareer.aspx

1Network, Network, Network - Take advantage of any networking

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may qualify for CPE and you may have to pay for some courses out

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6Remain Mobile and Flexible - Today’s young CPA needs to remain

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7Turn to Specializations and Credentials - There is a huge respect

and an even bigger demand for CPAs who specialize and carry

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8Setting goals - Add to it and take some goals away, but by all

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10

9Be genuine - By all means, no matter how you try to advance your

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TOPTen

Things Young CPAsShould Focus On ForTheir Careers

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LITIgaTION SERVIcES - Divorce court case

It happens, likely more often than weknow. A couple gets a divorce and thejudge awards the non-business owneran “equalization payment.” In manycases, that is the end of the story. How-ever, in some cases, it is just the begin-ning. It can happen that the equaliza-tion award is unrealistic for one orboth of two basic reasons. The first isthat the business owner’s businessinterests are illiquid, making it difficultif not impossible for the businessowner to pay the equalization pay-ment, at least in the short-term (whichis often what is ordered by the court).Secondly, the court may sometimesassign values to the business intereststhat are not in line with the fair marketvalue of the business interests. Whenthis happens and the assigned valuesare too high, the liquidity issue is exac-erbated.

A recent appellate case in Indi-ana, Jeffrey Crider, appellant, vs. Christi-na Crider, appellee (No. 53A05-1307-DR-358 and 53A04-1401-DR-26), putthe spotlight on these and many moreissues. Husband (H) in this caseowned a number of business interests,primarily related to real estate con-struction and development. The oper-ating company was a corporation, andmost of the other entities holding realestate in various stages of developmentwere in the form of LLC interests. In abattle of the four experts—two in busi-ness valuation and two in real estateappraisal—the judge arrived at opin-ions regarding the aggregate valuesthat resulted in a directed equalizationpayment from H to W of around $4.7million.

There were a number of con-tentious issues regarding the values.The real estate appraiser for W deter-mined a significantly higher value than

the real estate appraiser for H. The pri-mary difference related to whether ornot the property was, at the time of val-uation, still a viable short-term devel-opment project or instead was a long-term project at best, given the state ofthe economy. The W’s expert pre-vailed, resulting in an assigned valueto the marital estate approximately fivetimes the value determined by H’sappraiser.

As to the operating business,one of the material differences in thevalue related to the value of bondanticipation notes (BANS) listed on thebalance sheet of the company at $5.8million. W’s expert maintained that,even though that might not be the cur-rent fair market value of the BANS, thebook value should be determinative ofthe value for the marital estate. H’sexpert, based on subsequent TIF bondsissued and the depressed value of thereal estate at the date of value, valuedthe BANS at $1.150 milion. The courtdecided to accept W’s expert’s bookvalue of the BANS as the value for themarital estate, even though W’s expertadmitted that the book value might notbe the fair market value.

The end result was a maritalestate of over $11 million, which thetrial court split evenly between the par-ties. This resulted in an “equalizationpayment” of $4,752,066 from H to W.The payment was due in 180 days,with interest accruing beginning after90 days. The Appellate Court upheldthe valuation of the business interestsand the accruing of interest (at theIndiana statutory rate of 8 percent, ahefty rate given the current marketrates of interest) after 90 days.

As noted, there were manycontentious issues relating to the val-ues of the business interests and the

assets held within those interests.These issues fell, at the Trial Court,almost unanimously to W’s side of theledger. Whether right or wrong, theresulting $4.8 million payment had tobe made in relation to very illiquidassets held by H. The value was imbed-ded almost exclusively in closely heldbusinesses containing highly illiquidassets such as real estate, includingundeveloped land. The primary oper-ating business was a construction busi-ness involved in road and “other con-struction work.” H did not own a con-trolling interest in any of these busi-nesses, which further complicated andincreased the illiquidity of his inter-ests.

H’s only apparent ability topay the equalization payment was toeither borrow funds or transfer someof the ownership in the entities to W.The court imposed security interestsfor payment of the “equalization pay-ment” using H’s ownership interests in


a taNglED WEb

r. jameS alerding,CPA/ABV, ASA

Alerding ConsultingIndianapolis, IN

[email protected]

Problems Arise when Appellate CourtAwards ‘Equalization Payment’

expertTIPA myriad of problems can result in

a divorce where the assets of the

parties are essentially illiquid and

the parties do not have control of

the entities.


LITIgaTION SERVIcES - Divorce court case, continuedthe entities. If H attempted to borrowfunds to pay off the “equalization pay-ment,” he would face the problem offinding lenders who might disagreewith the court’s interpretation of thevalue of the businesses and would like-ly heavily discount his interest for itslack of control.

While there is no doubt thatthe courts are sincere in their efforts toequitably determine and distribute themarital estate, complex situations likethis one—with substantial closely heldbusiness interests of uncertain truevalue—will likely lead to future litiga-tion over ultimate settlement of themarital estate between the parties.

Realizing the illiquidity issueswere going to complicate the comple-tion of the “equalization payment”from H to W, the Trial Court judge pro-vided security to W in case the pay-ment was not made on a timely basis,i.e., 90 days, as allotted by the court (atthe Indiana statutory rate of 8 percent),in the following manner:

Christy shall be given a securitylien on all of Jeff’s shares and own-ership interests in Crider & Criderand the Crider Entities (and of anysuccessor to or affiliate thereof).Jeff shall pledge his shares andownership interests in these busi-nesses to secure Christy’s judg-ment.

If within 180 days of this Court’sFinal Decree Jeff has not paid theJudgment in full, Christy shall takeownership and control of one halfof Jeff’s shares in Crider & Criderand the Crider Entities. Christyshall retain ownership and controlof these shares in these entitiesuntil such time as the Judgmenthas been paid in full with allaccrued interest. Jeff shall beresponsible for any attorney’s feesincurred by Christy in the courseof collecting this Judgment or inexecuting her security interest inJeff’s shares of Crider & Crider andthe Crider Entities.

H appealed the imposition of the secu-rity interests by the Trial Court. Whilenoting that the Trial Court did havejurisdiction and authority to imposesecurity, the Appellate Court alsoemphasized that those liens could beforeclosed upon to pay the equaliza-tion payment. The court noted that,“The trial court divided the maritalproperty, not the businesses, andordered Jeff to make an equalizationpayment, while providing mecha-nisms for Christina to enforce thatjudgment.”

However the Appellate Courtdid find that the Trial Court exceededits authority when it permitted anautomatic foreclosure of W’s interests.Also noting that, “[t]he creation of jointcontrol or ownership of assets indivorced persons should be avoidedunless there are insufficient assets tootherwise divide the property,” theAppellate Court went on to discuss thefact that, since closely held businessesdepend heavily on the business skillsof the principal owners, continuedentanglement of the two spousesshould be avoided. However, theAppellate Court also noted that such acontinued entanglement through thesecurity was unavoidable in a case likethis where so much of the value relatedto H’s interest in the family businesses.Not allowing that would render theability to pay the equalization paymentmoot.

The Trial Court had given Wfull “ownership and control” of one-half of H’s shareholdings and member-ship interests in the family businessesif the equalization payment was notpaid within 180 days. The AppellateCourt noted that “ownership and con-trol” was too broad and vague a con-cept, and thus limited the securityinterests, suggesting that the TrialCourt could have given W interest inonly the non-voting shares of the mainoperating company.

After winding its way througha number of issues regarding the own-ership of shareholder and membershipinterests, the Appellate Court notedthat while W’s security interests couldbe appropriately sold at a Sheriff’s auc-tion the sale would be subject to therestrictive agreements in place for boththe stock company and the LLC mem-bership interests. While further notingthat such restrictive agreements werespecifically between shareholders (ormembers) and between shareholdersand the corporation (or LLC) and thoseagreements were not “a contract withthe world at large,” it nevertheless rec-ognized the corporation’s (or LLC’s)right to enforce those agreements on asubsequent shareholder or member.

The Appellate Court alsonoted that in Indiana the only interestwhich W could obtain through foreclo-sure of the security on the LLCs wouldbe an assignee interest. Such an inter-est would be at the mercy of the othermembers for any distributions or otheractions.

In the end, the Appellate Courtgranted wide berth for a trial court toimpose security interests on stocks andmembership interests held by a partyto a divorce, but it did not change thecontractual arrangements in place toprevent the stock or membership own-ership from ending up in the hands ofan unwanted shareholder or member.Notwithstanding, enforcement, fore-closure, and exercise by other share-holders or members or the entities ofthe restrictive agreements could ulti-mately change the ownership structure

Continued on page 21


LITIgaTION SERVIcES - court cases

introduCtionHundreds of legal opinions are issueddaily. It is important for the financialand accounting expert to be aware ofrelevant case law. Below is a detailedsummary of several of the most rele-vant cases affecting financial andaccounting experts from January 1,2010 to July 31, 2014. Actual, quotedlanguage from the respective courtcases is indented.

lay witnesses with some specializedknowledge can sometimes provideopinion testimony. In U.S. v. McMillan, 600 F.3d 434 (5thCir. 2010), the defendants appealedtheir conviction for conspiracy andmail and wire fraud convictions in con-nection with the failure of an HMO inLouisiana. The defendants argued thatthe District Court violated its role asgatekeeper for expert evidence byallowing three fact witnesses to giveopinions based on Louisiana’s statuto-ry accounting rules when the witness-es were not qualified as experts underLouisiana law. The three witnessesincluded a CPA, a former insuranceregulator, and an auditor. The FifthCircuit Court of Appeals held thatallowing these individuals to provideopinion testimony was harmless andinsinuated that lay witnesses withsome specialized knowledge may beable to provide limited opinion testi-mony in their area of knowledge. Thecourt stated that:

To the extent that some of the wit-nesses’ testimony may have impli-cated specialized knowledge bydefining certain accounting termsand discussing standardizedaccounting guidelines, we con-clude that the error in the testimo-ny, if any, was harmless because in

the context of the entire trial we seeno reasonable basis to find aneffect on the jury’s verdict.

Daubert analysis applies to theprocess for the expert’s conclusions;not the conclusions themselves.In Hankins v. Ford Motor Co., Case No.3:08-cv-639-CWR-FKB (S.D. Miss.,2011), the District Court heard thedefendant’s motion to exclude theexpert testimony of two of the plain-tiff’s experts. The District Court exten-sively cited Daubert v. Merrill DowPharmaceuticals, 509 U.S. 579 (1993) instating that the Daubert analysisapplies to the process of the expert’sconclusions, not the merits of the con-clusions themselves. The meritsremain subject to attack under cross-examination, presentation of contraryevidence, and careful instruction onthe burden of proof. The court alsonoted that the Fifth Circuit Court ofAppeals had observed that under theregime of Daubert, a district judgeasked to admit scientific evidence mustdetermine whether the evidence isgenuinely scientific, as distinct frombeing unscientific speculation offeredby a genuine scientist.1 “The extrapo-lation or ‘leap’ from an accepted scien-tific premise to an unsupportedone…must be reasonable and scientifi-cally valid.” The District Court judgedenied the motion to exclude the plain-tiff’s experts, stating that most of Ford’sarguments went to the weight of theexpert’s testimony as opposed to theadmissibility.

expert’s data vs. methodologyIn Manpower, Inc. v. Ins. Co. of the Stateof Pennsylvania, 732 F.3d 796 (7th Cir.2013), Manpower claimed businesslosses due to the inability to access its

office space for over a year due to abuilding collapse. Manpower’saccounting expert, without whomManpower could not establish its busi-ness interruption damages, wasexcluded by the District Court, but theexclusion was reversed by the SeventhCircuit Court of Appeals. The opinionprovides a lengthy discussion regard-ing the data chosen by an expert versusthe methodology applied to that data.

Manpower retained a forensicaccounting expert who opined that thebusiness interruption damages wereover $5 million. The District Courtgranted the defendant’s motion toexclude the accountant’s opinionbecause it was not the product of a reli-able methodology. There was no dis-pute that the accountant was qualifiedas an expert by knowledge, skill, expe-rience, training, or education. The Dis-trict Court stated that the accountantdid little more than extrapolate a 7.6percent growth rate for Manpower asit had experienced the previous year(despite the expert’s testimony that he

uPDatE


expertTIPHundreds of legal opinions are

issued daily. It is important for the

financial and accounting expert to

be aware of relevant case law.

jeFF Windham, JD, CFE

Forensic Strategic Solutions, Inc.Birmingham, AL

[email protected]

case law


LITIgaTION SERVIcES - court cases, continued

considered previous years that hadlower growth rates, but in his profes-sional judgment, 7.6 percent wasappropriate as Manpower just com-pleted a new acquisition).

The Court of Appeals found thatthe District Court exercised its gate-keeping role under Daubert with “toomuch vigor” and overturned theexclusion of the forensic accountingexpert. The Appeals Court stated:

District judges have ‘considerableleeway in deciding in a particularcase how to go about determiningwhether particular expert testimo-ny is reliable.’ Kumho Tire Co., 526U.S. at 152, 119 S.Ct. 1167. Reliabil-ity, however, is primarily a ques-tion of the validity of the method-ology employed by an expert, notthe quality of the data used inapplying the methodology or theconclusions produced. ’Thesoundness of the factual underpin-nings of the expert’s analysis andthe correctness of the expert’s con-clusions based on that analysis arefactual matters to be determinedby the trier of fact, or, whereappropriate, on summary judg-ment.’ Smith v. Ford Motor Co., 215F.3d 713, 718 (7th Cir.2000). ‘Rule702’s requirement that the districtjudge determine that the expertused reliable methods does notordinarily extend to the reliabilityof the conclusions those methodsproduce — that is, whether theconclusions are unimpeachable.’Stollings v. Ryobi Technologies, Inc.,725 F.3d 753, 765 (7th Cir. 2013).The District Court usurps the roleof the jury, and therefore abuses itsdiscretion, if it unduly scrutinizesthe quality of the expert’s data andconclusions rather than the relia-bility of the methodology theexpert employed. See id. at 766;Smith, 215 F.3d at 720.

Admittedly, this is not always aneasy line to draw. As the SupremeCourt observed in General ElectricCo. v. Joiner, 522 U.S. 136, 146, 118S.Ct. 512, 139 L.Ed.2d 508 (1997),

‘conclusions and methodology arenot entirely distinct from oneanother. Trained experts common-ly extrapolate from existing data.’The critical inquiry is whetherthere is a connection between thedata employed and the opinionoffered; it is the opinion connectedto existing data ‘only by the ipsedixit of the expert,’ id., that is prop-erly excluded under Rule 702.

In this case, we conclude that theconcerns that prompted the Dis-trict Court to exclude Sullivan'sopinion implicated not the reliabil-ity of Sullivan’s methodology butthe conclusions that it generated.Sullivan ‘utilize[d] the methods ofthe relevant discipline.’ Bielskis, 663F.3d at 894.

We recently highlighted this dis-tinction in Stollings v. Ryobi Tech-nologies, Inc., 725 F.3d 753, 765 (7thCir. 2013), where we held the Dis-trict Court’s exclusion of expertopinion to be an abuse of discre-tion. There, as here, the districtjudge had agreed that the expertcorrectly employed a validmethodology but found theexpert’s opinion unreliable onlybecause he concluded that one ofthe key data inputs he used wasnot sufficiently reliable. See 725F.3d at 766. In reversing the exclu-sion of the expert, we noted thateven though the data input inquestion ‘was undoubtedly arough estimate,’ ‘[t]he judgeshould have let the jury determinehow the uncertainty about [the



LITIgaTION SERVIcES - Divorce court case, continued

accuracy of the data input] affectedthe weight of [the expert’s] testi-mony.’ Id. at 767.

In an entertaining example, the courtalso stated in regards to the data beingreasonable,

an expert must employ those kindsof facts or data on which experts inthe field would reasonably rely, so[the expert] could not have basedhis earnings projections onchanges in the size of the whiterhino population in Africa, but hedid not go amiss in basing them onManpower’s actual earnings.

expert and loss causation/ no loss causationIn In re Omnicom Group, Inc. SecuritiesLitigation, 597 F.3d 501 (2nd Cir. 2010),the Second Circuit Court of Appealsaffirmed summary judgment for thedefendants in this case alleging securi-ties fraud against Omnicom Group,Inc. and its managers.

The plaintiff’s expert witnessprepared an event study and was pre-pared to testify that the investing pub-lic’s initial reactions to the partially cor-rective disclosures in June 2002 weretied to the news of Omnicon’s inappro-priate accounting for investments inInternet-related entities and not toother news during that time period.He also stated that “The declines fromJune 5 to June 13, 2002, would not haveoccurred on those dates had Defen-dants not previously engaged in thefraudulent scheme alleged by Plain-tiffs. The information revealed in thattime period constituted a partial reve-lation of information about thisscheme.” Regarding the expert’s testi-mony, the Appeals Court said:

Summary judgment is appropriatehere because [Expert’s] testimonydoes not suffice to draw the requi-site causal connection between theinformation in the June 12 articleand the fraud alleged in the com-plaint. His event study merely‘links the decline in value of [thecompany’s] stock to variousevents.’

Importantly, however, the AppealsCourt noted that there were conflictingexpert reports in this case and, “where,as in this case, there are conflictingexpert reports presented,” courts arewary of granting summary judgment.(Citing Harris v. Provident Life & Acci-dent Ins. Co., 310 F.3d 73, 79 (2nd Cir.2002).

the expert witness and reasonableinference of causationIn Gould v. Winstar Communications,Inc., 692 F.3d 148 (2nd Cir. 2012), theSecond Circuit Court of Appeals vacat-ed the District Court’s grant of summa-ry judgment for the defendant GrantThornton (GT) and remanded the casefor further proceedings. Gouldinvolved numerous plaintiffs suingWinstar Communications (Winstar), atelecommunications company, and GT,who performed audits of the financialstatements of Winstar from 1994 untilWinstar filed for bankruptcy in 2001.The record reflects that the relation-ship between Winstar and GT began todeteriorate in 1999 when at least onemember of Winstar’s Board of Direc-tors urged that the GT partner oversee-ing the audits be removed. GT’s 1999Winstar audit noted red flags in Win-star’s transactions with its strategicpartner Lucent Technologies. Thesetransactions totaled $114.5 million inrevenue for Winstar, constituting 26percent of Winstar’s reported 1999operating revenue, and were anattempt to cover up losses in Winstar’score business. GT ultimately approvedWinstar’s recognition of revenue inconnection with these transactions.

Among other issues, GT arguedthat the plaintiffs failed to establish thecausation elements of their claim.However, the Court of Appeals foundthat the deposition testimony of thePlaintiffs’ expert witness economist,along with press releases from 2001regarding Winstar’s losses were suffi-cient to establish that Winstar hadengaged in improper revenue recogni-tion practices for a period of timeincluding 1999. The Court of Appealsstated that, “a jury could infer from the

expert witness testimony and otherevidence that the decline in Winstar’sstock price in 2001 was attributable inpart to the alleged fraud and GT’s fail-ure to discover the fraud.”

GT argued that any decline inWinstar’s stock price was caused byother factors. In regard to these argu-ments and in vacating the summaryjudgment for GT, the court stated:

But these facts, if established,hardly foreclose the reasonableinference that some part of thedecline was substantially causedby the disclosures about the frauditself. We therefore conclude that ajury reasonably could find the req-uisite ‘causal link between [Win-star’s] alleged misconduct and theeconomic harm ultimately suf-fered’ by the Plaintiffs.

expert witness testimony about intent and the lawIn U.S. v. Stadtmauer, 620 F.3d 238 (3rdCir. 2010), the Third Circuit Court ofAppeals concluded that the DistrictCourt properly allowed an IRS agent todescribe how a partnership tax returnis prepared and the specific deductionsthat were improperly claimed by thedefendant in his trial for conspiracy todefraud the U.S. and for filing false taxreturns. The defendant argued that theIRS expert improperly testified as tothe defendant’s intent and that shemade “out-and-out mischaracteriza-tions” and “bald assertions” of the lawin explaining her opinions.

The Court of Appeals deter-mined, citing cases from other circuits,that an IRS agent’s testimony is admis-sible evidence regarding the proper taxconsequences of a transaction. Thecourt found that the IRS expert did nottestify as to intent in part because shenever used the words “false” or“fraudulent” in describing tax deduc-tions that she considered improper,and she did not base any portion of hertestimony on her assessment of thecredibility of other witnesses.

The court also determined thatthe IRS agent’s testimony about taxContinued on next page


wINDHam, continuedaLERDINg, continued

issues was bound to touch on the lawto some extent but that it did notinvade the province of the court. Infact, during the IRS agent’s testimony,the District Court emphasized to thejury that it was “bound to follow thelaw as [the Court] tell[s] you it appliesin this case.”

Daubert challenge (successful)In Victory Records, Inc. v Virgin RecordsAmerica, Inc., 2011 WL 382743 (N.D. Ill.Feb. 3, 2011), the U.S. District Court forthe Northern District of Illinois heardthe case involving damages for thedefendant’s interference with plain-tiff’s album recording contract. Victo-ry said that the sales for the band inquestion on their second, third, andfourth albums would have been signif-icantly higher but for the actions of thedefendants. Victory sought severalmillion dollars in compensatory dam-ages and $25 million in punitive dam-ages. Victory’s expert witness calculat-ed lost profits using both the “beforeand after” method and the “yardstick”method. Both methods had been pre-viously accepted in cases of this type.

The court determined that theassumptions underlying the methodswere unreliable. Under the “beforeand after method,” for the projectedlost sales on the second album, theexpert added the sales and downloadsof the second album and then applied

the rate of return that the first albumexperienced. For all three albums, theexpert calculated a per-unit profitbased on the first album as the low endand then calculated 10 percent and 15percent increases for middle and highends.

The “yardstick” method hadbeen previously accepted in othermusic industry tortious interferencecases but had compared the plaintiff’slost sales to eight other bands. Victo-ry’s expert only selected one singleband for comparison based on theowner of Victory’s knowledge of bandsand not the expert’s knowledge. Also,the expert did not consider possiblealternative explanations for the drop insales on the second album.

The court found that the expertdid not explain why it was acceptableto use only one band for comparison inthe “yardstick” method as opposed toa sample. Second, the expert failed toconsider alternative explanations forthe lost sales on the second album.There was evidence of some negativecontroversy for the band that the courtsaid could have contributed. Inexcluding the expert’s testimony, thecourt said that when a party’s internalprojections rely on its “say-so” asopposed to statistical analysis, they areunreliable under Daubert. c

1 Citing Moore v. Ashland Chem., Inc., 151 F.3d 269, 276(5th Cir. 1998)(en banc).

of the family entities and cause a con-siderable amount of damage to theentities themselves as a result.

This case is an excellentdemonstration of the myriad of prob-lems that can result in a divorce wherethe assets of the parties are essentiallyilliquid and the parties do not havecontrol of the entities. The problemsare not one-sided, however. Theyaffect both the propertied and the non-propertied spouse. The propertiedspouse may have extreme difficulty inpaying off the equalization payment,especially in the short-term. Thiscould result in losing some or all of theinterest in the entities. This mightresult in the loss of future benefits thatwere the foundation of the value deter-mined by the court. The non-proper-tied spouse is in a position of not hav-ing any control over distributions andnot having any control over the opera-tions of the businesses. In the case ofmembership interests, in Indiana, atleast, the interest acquired by the non-propertied spouse can only be anassignee interest, which has even fewerrights than the actual interests thatmight be acquired in a foreclosure onthe corporate interests. Even in thecase of the corporate interests, thecourt affirmed the contractual rightsattached to those interests that wouldallow the corporation to buy thoseinterests back.

I have been involved in casessuch as the Crider case and can affirmthat the only winners, financially, arethe attorneys and accountants. Whilethe Crider case applies only in Indiana,it is a case that any attorney and/orfinancial and valuation expert shouldbe aware of when conducting a divorcesuch as the Crider situation. Itbehooves attorneys and advisors onboth sides to do their best to forge asettlement that will avoid the disas-trous results in Crider and yet providea platform where both parties can betreated equitably. c

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FINaNcIaL VaLuaTION aND LITIgaTION EXPERT - Panel of Experts

R. jAMES ALERding, CPA/ABV, ASAis the owner of Alerding Consulting, LLC (Valuation and Forensic Con-sultation) in Indianapolis, IN. He has over 35 years of experience in val-uation and litigation. Jim is a member of the AICPA Business ValuationHall of Fame and was a member of the AICPA Task Force that devel-oped the AICPA Business Valuation Standards (SSVS No.1).

StEVE BABitSky, jdfounded SEAK, sponsor of the nation’s largest Workers’ Compensationand Occupational Medicine conference, in 1980. SEAK is the world’sleading provider of expert witness training and texts, writing seminars fordoctors and lawyers, and publisher of national directories for Expert Wit-nesses and IME Doctors. Steve is also the founder and president ofCustomized Forensic Consulting.

jEFF BALCoMBE, CPA/ABV/CFF/CgMA, CFA, ASAis president, chief executive officer, and partner of The BVA Group LLCin Houston, TX. With 20 years of experience, he has testified on issuesrelated to economic damages and lost profits analyses, patent andcopyright infringement, misappropriation of trade secret violations, pur-chase price disputes, wrongful contract termination, shareholder dis-putes, financial fraud allegations, securities class actions and valuationissues.

don BARBo, CPA/ABVis a director for Deloitte Financial Advisory Services in Dallas, TX. Hehas extensive experience in healthcare valuation involving mergers andacquisitions, divestitures, partnership transactions, leasing arrange-ments, divorces, and commercial damages. He speaks to variousorganizations, has published articles regarding BV issues, and servesas an expert witness.

nEiL BEAton, CPA/ABV/CFF, CFA, ASA is the managing director at Alvarez & Marsal Valuation Services. Aformer member of the AICPA BV Subcommittee, the AICPA Valuation ofPrivate Equity Securities Task Force, and FASB’s Valuation ResourceGroup, Neil is a prolific presenter, teacher and writer and member of theAICPA BV Hall of Fame.

BRuCE B. BinghAM, FRiCS, FASAis an executive director at Capstone Advisory Group, LLC in New YorkCity. He has previously served as chair of both the RICS-Americas Val-uation Council and the ASA BV Committee. Bruce graduated from Rut-gers and also has a masters degree from the Yale School of Manage-ment. He is a retired brigadier general, US Army Reserve.

kRiStoPhER A. BouShiE, CPA/ABV/CFF, CVA, CFE is a managing director with Stout Risius Ross, Inc. in Washington, D.C.He has over 29 years of experience in financial and litigation consulting,with over 22 years focused on intellectual property matters. He is co-author/co-editor of Calculating and Proving Damages, Law JournalPress.

StEPhEn j. BRAVo, CPA/ABV/PfS, ASA, CBA, mSTis the founder of Apogee Business Valuations, Inc. He is a frequentspeaker and writer on valuation issues and matters. He is a technicaleditor of Valuing a Business and other books written by Dr. ShannonPratt. He is also a technical reviewer of Cost of Capital written by RogerGrabowski and Dr. Pratt.

Rod P. BuRkERt, CPA/ABV, CVA, MBAis the founder of Burkert Valuation Advisors, LLC. His assignmentsfocus on income/gift/estate situations, divorce proceedings, partner/shareholder disputes, and commercial damage/economic loss matters.He also provides independent report review and project consulting serv-ices to assist other practitioners with their engagements. Rod is a pastchairman of NACVA’s Executive and Education Advisory boards.

thoMAS F. BuRRAgE, CPA/ABV/CFF, CVA, dABFA is a principal in Burrage & Johnson, CPAs, LLC, The Forensic Firm inAlbuquerque, NM. His fields of expertise include litigation, forensicaccounting, business valuation and taxation. He is co-author of Divorceand Domestic Relations Litigation: Financial Advisor's Guide,a contribut-ing editor to the Guide to Divorce Taxation and the Guide to Tax Plan-ning for High Income Individuals, and has been published in both theJournal of Accountancy and the Family Advocate.

StACy PRESton CoLLinS, CPA/ABV/CFF is a managing director at Financial Research Associates, specializingin business valuation, forensic accounting and litigation support servic-es. She has provided expert witness testimony in New York, New Jer-sey, Pennsylvania and Florida. She is chair of the AICPA’s Family LawTask Force and a member of its Forensic and Litigation Services Com-mittee.

LARRy R. Cook, CPA/ABV/CFF, CBAbrings 40+ years of financial advisory services to clients, including valu-ation, tax, family law, expert testimony, commercial finance, invest-ments, retirement, and entity structure. He has made numerous presen-tations and is a frequent speaker at conferences. Larry is the author ofFinancial Valuation and Employee Stock Ownership Plan Shares and aco-author of Financial Valuation Applications and Models.

dR. MiChAEL A. CRAin, CPA/ABV, ASA, CFA, CFEis a principal with The Financial Valuation Group in Fort Lauderdale, FL.Mike has been practicing for over 25 years. Mike is a past chairman of theAICPA business valuation committee and has been inducted into theAICPA Business Valuation Hall of Fame. He is a recipient of AICPA’sLawler Award presented by Journal of Accountancy for best article of theyear.

MARk o. diEtRiCh, CPA/ABV, MBA, MStis editor, technical editor and contributing author to the American HealthLawyers Association/Business Valuation Resources Guide to Health-care Valuation, 3rd ed.; co-editor of the BVR.ALA Guide to HealthcareIndustry Compensation and Valuation; and co-author with GregoryAnderson, CPA/ABV of The Financial Professionals Guide to HealthcareReform. Along with his practice, he teaches Corporate Finance andValuation at Boston University.

dARRELL d. doRRELL, CPA/ABV, mBA, ASA, CVA, CmA, Cff is co-founder of financialforensics®. He delivered 120+ forensicaccounting training sessions during the last 5 years and has publishedover 70+ articles in technical journals. He co-authored three forensicaccounting publications for the US Dept. of Justice (USDOJ) and co-authored Financial Forensics Body of Knowledge. His civil/criminalpractice transcends all aspects of civil and criminal financial forensics.

EdwARd j. duPkE, CPA/ABV/CFF/CgMA, ASA is the owner of Dupke Consulting, with his practice limited to businessvaluation litigation defense and business valuation rebuttal consulting.He chaired the task force that wrote the AICPA BV Standard (SSVS1),is former chair of the AICPA BV committee and past chair of the Michi-gan Association of CPAs. With over 35 years of experience, he is a qual-ified expert witness in state and federal courts and a BV instructor at thestate and national level.

w. dAVid ELLRiCh, jR., CPA/ABV, ASA, CVA, MAFF, CFEis a founder of Moore, Ellrich and Neal, P.A. in Palm Beach Gardens, FL.He has worked as an IRS agent and as a special agent for the U.S.Treasury. After his government work, David began his own accountingpractice in 1981. He has served on the Judicial Nominating Commissionof the 15th Judicial Circuit (FL) and has received numerous courtappointments as a special master.

jAy E. FiShMAn, FASAis a managing director of Financial Research Associates. He has co-authored several books, including Standards of Value: Theory and Appli-cations and Guide to Business Valuations. He is an expert witness andhas taught courses to the IRS, the National Judicial College, the HongKong Society of Accountants and World Bank in Russia.

CARLA g. gLASS, CFA, FASAis a managing director in the valuation and litigation consulting firm ofHill Schwartz Spilker Keller LLC and is former chair of the Business Val-uation Committee of the American Society of Appraisers and of theAppraisal Standards Board of The Appraisal Foundation. She serves onFASB’s Valuation Resource Group and has been a course developer of,and teaches, ASA courses.

RoBERt P. gRAy, CPA/ABV/CFF, CgMA, CFE is a partner in ParenteBeard LLC National Forensic Litigation & Valua-tion Services Group and heads its Texas practice. He is a member ofAICPA’s Forensic & Valuation Services Committee and the Texas Soci-ety of CPA’s BV and Valuation Services Committee, where he is currentchair of its BV, Forensics & Litigation Conference. He is a nationally rec-ognized speaker on financial/accounting analyses, economic damages,litigation consulting, BV, and forensic/fraud investigations.



ChRiS hAMiLton, CPA, CFE, CVAis a partner with The Arxis Group in Simi Valley, CA, and most of his pro-fessional time is spent in the areas of business valuations, fraud, foren-sic accounting and litigation-related engagements. He has publishedarticles and spoken around the country on issues related to valuationand forensic accounting. He is a co-author of Financial Valuation Appli-cations and Models.

j. MiChAEL hiLL SR., FASA, CBAis a shareholder in the valuation/litigation consulting firm of Hill SchwartzSpilker Keller, LLC and is former chairman of the BV Committee of theASA. He also served as chair of the Appraisal Foundation and was acourse developer and instructor for the ASA.

j. MiChAEL hiLL jR., ASA, CPA/ABVis a shareholder in the valuation and litigation consulting firm of HillSchwartz Spilker Keller, LLC. He is past chair of the ASA BV committee.He earned a BBA in accounting and finance from the University ofTexas.

thoMAS E. hiLton, MSF, CPA/ABV/CFF, CVA, CgMAis director of the Forensic & Valuation Services Group at Anders Minkler& Diehl LLP in St. Louis, MO. He is an adjunct professor at the JohnCook School of Business, St. Louis University. An experienced forensicaccountant and expert witness, he is past chair of the AICPA Forensic &Valuation Services Executive Committee, a board member for theAICPA, and a member of AICPA Governing Council.

jAMES R. hitChnER, CPA/ABV/CFF, ASAis managing director of Financial Valuation Advisors, Ventnor City, NJ, afounding member and president of The Financial Consulting Group, andCEO of Valuation Products and Services. He is editor/co-author ofFinancial Valuation Applications and Models; co-author of Financial Val-uation Workbook; co-author of Valuation for Financial Reporting; andeditor of Financial Valuation and Litigation Expert.

MARk g. kuCik, CPA, CVA, CFF, CM&AA was named “Instructor of the Year” by NACVA. Mark teaches exten-sively and is a member of NACVA’s Training and Development Team.He co-authored training materials for the CVA certification program,represented NACVA on the CLARENCE committee, and developed a4-day seminar on business valuation for the IRS. He is a sought-afterspeaker and media resource for expert information on valuation ofclosely held businesses.

ERiC w. nAth, ASAhas been a valuation professional since 1985 and founded his own com-pany, Eric Nath & Associates in 1991. He has written landmark articleson control premiums and cost of capital and is a frequent speaker onthese topics. One area of focus for Eric is valuing minority interests, andas a member of the BV Standards Subcommittee for ASA he was theprincipal author of the procedural guideline on valuation of partial own-ership interests.

EVA M. LAng, CPA/ABV, ASAis the executive director of The Financial Consulting Group, LC, andpresident of Valuation Products and Services, LLC. She is a a memberof the AICPA BV Hall of Fame and a co-author/contributing author to sixbooks, including The Best Websites for Financial Professionals, Busi-ness Appraisers, and Accountants.

M. MARk LEE, CFA, ASAis a valuation principal of EisnerAmper LLP. His responsibilities haveincluded serving as principal-in-charge of the Valuation Services Prac-tice of KPMG LLP’s Northeastern Region and as vice chairman of Bear,Stearns & Co. Inc.’s Valuation Committee, as well testifying in court. Heteaches BV at the New York University School of Continuing and Profes-sional Studies.

howARd j. LEwiS, AVA, ABAR is the executive director of the Institute of Business Appraisers in Plan-tation, FL. Howard is the former National Program Manager for the Val-uation Program at the Internal Revenue Service. He holds the AVA andABAR designation from the National Association of Certified ValuationAnalysts.

dERALd LyonS, Mt, CPA/PFS, CVA is president of Lyons & Seacrest, P.C., CPAs in Denver, CO. He is anationally recognized author and presenter on valuation matters. He isa co-author of Financial Valuation Applications and Models. He hasbeen qualified as an expert witness and provided testimony regardingvaluations and other financial matters on numerous occasions.

MiChAEL j. MARd, CPA/ABVis managing director of the Financial Valuation Group of Florida, Inc. Hewas founding president of The Financial Consulting Group (FCG) andlead author of Driving Your Company's Value: Strategic Benchmarkingfor Value. He is co-author of Valuation for Financial Reporting: Intangi-ble Assets, Goodwill, and Impairment Analysis-SFAS 141 and 142, andco-author of Financial Valuation Workbook.

L. gAiL MARkhAM, CPA/ABV/CFF, CFE®, CFP®, CERtiFiEd FAMiLy MEdiAtoR is president of Markham Norton Mosteller Wright & Co., P.A. She is thefounding partner of the firm and head of its Forensic Accounting, Litiga-tion & Mediation Services team. Gail has extensive experience in litiga-tion services, mediation and forensic accounting. She has been recog-nized on numerous occasions as an outstanding community leader inSouthwest Florida.

hARoLd g. MARtin jR., CPA/ABV/CFF, ASA, CFE, MBA is partner-in-charge of Valuation and Forensic Services for Keiter inRichmond, VA, and an adjunct instructor for The College of William andMary Mason Graduate School of Business. He is a former member ofthe AICPA BV Committee, former chair of the AICPA BV Conference, anAICPA instructor, and an inductee into the AICPA BV Hall of Fame.Harold is co-author of Financial Valuation Applications and Models.

giLBERt E. MAtthEwS, CFAis chairman of Sutter Securities Incorporated in San Francisco. He hasmore than 50 years of experience as an investment banker. At BearStearns in New York, he was responsible for all fairness opinions andvaluations for 25 years. He has written several book chapters and arti-cles on fairness opinions and corporate valuations and has testified innumerous federal and state courts.

Z. ChRiStoPhER MERCER, ASA, CFA, ABAR is founder/chief executive officer of Mercer Capital, one of the country’sleading independent business appraisal firms. He has prepared, over-seen, or contributed to valuations for purposes related to M&A, litigation,and tax, among others. Chris is a prolific author (four textbooks andscores of articles) and a frequent speaker on valuation topics.

dR. ShAnnon P. PRAtt, FASA, MCBA, CFA, CM&AA is chairman/chief executive officer of Shannon Pratt Valuations, LLC;Publisher Emeritus for BV Resources, LLC; and a board member ofPaulson Capital Corp. He is the best-known authority in the field of BVand the author of many books, including Guide to Business Valuations,now in its 16th edition and Valuing a Business, 5th edition.

wiLLiAM C. quACkEnBuSh, MBA, ASA, MCBA, ABAR, BCA is the founder of Advent Valuation Advisors. Bill provides valuation fortax and financial statement compliance and litigation support in dam-age/economic loss matters. He is the past chair of the ASA’s BusinessValuation Committee, former editor of the ASA’s weekly BV E-Letter, andvice chair of IIBV. He teaches for both the ASA and the IIBV and writesand speaks on BV issues.

RAyMond RAth, ASA, CFA is managing director of Globalview Advisors. With 30+ years of expert-ise, he has performed valuation projects for financial and tax reporting,transactions and litigation. He has organized and moderated confer-ences on fair value issues, including presentations by staff of the SEC,PCAOB, FASB and IASB. He has led efforts resulting in an educationand certification program for an intangible assets valuation specialtydesignation.

RoBERt j. gRoSSMAn, CPA/ABV, ASA, CVA, CBA, MSt heads the BV and valuation services group at Grossman Yanak & FordLLP in Pittsburgh. A nationally recognized speaker and instructor ofbusiness valuation matters, he has extensive experience in valuationand litigation issues in a broad variety of applications and venues. He ispast chair of the NACVA Executive Advisory Board and a contributor toFinancial Valuation Applications and Models.



RonALd L. SEignEuR, CPA/ABV/CFF, ASA, CVA, CgMAis a partner in Seigneur Gustafson LLP, Lakewood, CO. Ron has over30 years of experience working with complex valuation, economic dam-ages, financial forensics, and related litigation support matters. He is co-author of Financial Valuation Applications and Models and an adjunctprofessor at the University of Denver College of Law.

john j. StoCkdALE, ASA, CPA/ABV/CFFhas been involved in business valuation since 1979. He heads up a firmin the Detroit area. His practice is concentrated in the valuation of smalland mid-market firms and in performing lost profit and damage claimanalysis.

ChRiS d. tREhARnE, ASA, MCBA, BVALis president of Gibraltar Business Appraisals, Inc. Combined with 25years of BV experience, Chris’s engineering, production and financialmanagement experience in public and closely held businesses bringunique perspectives to valuation topics. He is a faculty member for theASA’s Principles of Valuation certification program, a member of ASA’sValuation Standards Subcommittee and a member of The S CorporationAssociation’s Advisory Board.

gARy R. tRugMAn, CPA/ABV, MCBA, ASA, MVS is president of Trugman Valuation Associates, Inc., a BV/economic dam-ages firm in Plantation, FL and Parsippany, NJ. He is chair of the ASAethics committee and has served on numerous committees of the ASA,IBA, AICPA and various state CPA societies. He is author of Understand-ing Business Valuation and Essentials of Valuing a Closely Held Com-pany and has co-authored several other textbooks and articles in vari-ous publications. He is on the faculty of the National Judicial College.

LindA B. tRugMAn, CPA/ABV, MCBA, ASA, MBAis vice president of Trugman Valuation Associates, Inc. and serves as amember of the Executive Committee of the ASA. She is a former mem-ber of various committees of both the AICPA and IBA and lectures onbusiness valuation topics throughout the U.S. Linda is co-author ofFinancial Valuation Applications and Models.

MARk S. wARShAVSky, CPA/ABV/CFF, CVA, CBA, ASA,CFE, MAFF, dABFA, MBAis partner-in-charge of the firm’s BV and litigation services group withGettry Marcus CPA, P.C. in New York. Past chairman of the BV commit-tee for NYSSCPA, Mark currently serves on the editorial advisory boardsof several national publications. He is a nationally recognized speakerand founding member of NACVA’s Forensic Accounting Academy.

RiChARd M. wiSE, CPA, CA, Cff, fASA, mCBA, fRiCS, fCBV, CVAis partner of MNP LLP. Past president of The Canadian Institute of Char-tered Business Valuators and former Governor of ASA, he is a Fellow ofthe Ontario Institute of Chartered Accountants, author of Financial Liti-gation - Quantifying Business Damages and Values, co-author of Inves-tigative and Forensic Accounting Practice Issues (CICA), and a memberof the ASA BV Committee and Standards Subcommittee and NACVA’sLitigation Services Board.

donALd P. wiSEhARt, ASA, CPA/ABV/CFF, CVA, MSt is owner of Wisehart, Inc., a Rhode Island CPA and consulting firm, anda member of The Financial Consulting Group. With 30 years of profes-sional experience, he has given numerous BV presentations and hasdeveloped several courses for NACVA, where he chaired the EducationBoard. Don was also founding president of the Rhode Island BusinessAppraisal Group.

kEVin R. yEAnoPLoS, CPA/ABV/CFF, ASA is director of valuation services for Brueggeman and Johnson Yeanop-los, P.C., and a former member of the ASA’s International Board ofExaminers and the AICPA’s National Accreditation Commission. Kevin isa past chair of the AICPA’s ABV Credential Committee and a member ofthe AICPA Business Valuation Hall of Fame. He is a frequent author, pre-senter and instructor on many business valuation topics.

GUIDE TO ABBREVIATIONS

ABAR Accredited in Business Appraisal Review (NACVA)

ABV Accredited in Business Valuation, American Institute of Certified Public

Accountants (AICPA)

ASA Accredited Senior Appraiser, American Society of Appraisers (ASA)

BCA Business Certified Appraiser

BV Business Valuation

BVAL Business Valuation Accredited for Litigation (NACVA)

CA Chartered Accountant

CBA Certified Business Appraiser, Institute of Business Appraisers (IBA)

CDFA Certified Divorce Financial Analyst, Institute for Divorce Financial Analysts

CFA Chartered Financial Analyst , CFA Institute

CFE Certified Fraud Examiner, Association of Certified Fraud Examiners

CFF Certified in Financial Forensics, AICPA

CFFA Certified Forensic Financial Analyst, NACVA

CFP Certified Financial Planner, Certified Financial Planner Board of Standards, Inc.

CGMA Chartered Global Management Accountant

CIRA Certified Insolvency and Restructuring Advisor

CMA Certified Management Accountant

CM&AA Certified Merger & Acquisition Advisor, Alliance of Merger & Acquisition

Advisors

CPA Certified Public Accountant

CVA Certified Valuation Analyst, National Association of Certified Valuators and

Analysts (NACVA)

DABFA Diplomate of the American Board of Forensic Accounting

FASA Fellow of the American Society of Appraisers

FCBV Fellow of the Canadian Institute of Chartered Bsuiness Valuators

FRICS Fellow of Business Valuation specialty with the Royal Institution of Chartered Surveyors

JD Juris Doctor

MAFF Master Analyst in Financial Forensics

MBA Masters of Business Administration

MCBA Master Certified Business Appraiser, IBA

MST Masters of Science in Taxation

MVS Masters in Valuation Sciences

PFS Personal Financial Specialist (AICPA)

StACEy d. udELL, CPA/ABV/CFF, CVA is a partner in the Moorestown, NJ office of Gold Gerstein Group LLC,specializing in valuation and litigation support services. Stacey was acontributing author to the BVR/AHLA Guide to Healthcare Valuation andFamily Law Services Handbook: The Role of the Financial Expert, pub-lished by Wiley and Sons.

jEFFREy n. windhAM, jd, CFEis an attorney and certified fraud examiner who specializes in fraudexaminations, litigation consulting and economic damage analysis. Hehas experience across many industries including real estate, bankingand finance, securities and investments, construction, automotive, tech-nology, insurance, utilities, health care, restaurants, transportation andnon-profits. He serves as an expert witness in accountant liability andfinancial damages matters.

SCott R. SALtZMAn, CPA, CVA, ASA, MAFFpractices in BV, lost profits and earnings, forensic accounting, profes-sional malpractice, marital dissolution and financial damages. He ispresident of NACVA, past chairman of NACVA’s executive advisory andcertification boards, a current member of the Colorado Securities Board,and past member/president of the Colorado State Board of Accountan-cy.

RoBERt F. REiLLy, CPAis a managing director of Willamette Management Associates, a Chica-go-based business valuation firm. Robert is a certified public account-ant/accredited in business valuation/certified in financial forensics, char-tered global management accountant, certified management accountant,chartered financial analyst, certified business appraiser, and certified val-uation analyst. Robert has co-authored 12 textbooks, including Guide toIntangible Asset Valuation and A Practical Guide to Bankruptcy Valuation.


cost of capital corner2014 Valuation Handbook (CRSP Deciles Size Premia Study) (1)

2014 Valuation Handbook (Risk Premium Report Study) (1)

Using the HistoricalEquity Risk Premium

Using the Supply-SideEquity Risk Premium

Rf(2) 2.7% 2.7%

RPm (i.e., Equity Risk Premium, or ERP) (3) 7.0% 6.2%

RPs (CRSP 10th Decile)(4) 6.0% 6.0%

Cost of Equity(5) 15.7% 14.9%

Median: All 8 Market Capitalization Net Income Size Measures

Rf(6) 4.0% 4.0% 4.0%

RPm+s (25th Portfolio) (7) 14.2% 13.8% 13.4%

ERP Adjustment (8) 0.1% 0.1% 0.1%

Cost of Equity 18.3% 17.9% 17.5%

gross DomesticInflation Product

Historical (1926-2013)(9) 3.0% 3.3%

10 yr. forecast (10) 2.3% 2.5%

(1) Source: 2014 Valuation Handbook – Guide to Cost of Capital (Duff & Phelps, 2014). Duff & Phelps now pro-

vides valuation data (i) previously published in the Morningstar/Ibbotson SBBI Valuation Yearbook (discontin-

ued in 2013), and (ii) the data available in the Duff & Phelps Risk Premium Report in its new publication, the

Valuation Handbook – Guide to Cost of Capital. The “CRSP Deciles Size Premia Study” in the new Valuation

Handbook includes all of the critical size premia and other valuation data previously published in the Morn-

ingstar/Ibbotson SBBI Valuation Yearbook. (2) Risk-free rate. Source: 20-year constant maturity U.S. government bond (as of 10-20-14), Board of Gover-

nors of the Federal Reserve System at http://www.federalreserve.gov/releases/h15/data.htm(3) The equity risk premium (ERP, or notational RPm). (4) “Size Premium,” CRSP 10th decile, 2014 Valuation Handbook, Appendix 3, “CRSP Deciles Size Premia

Study: Key Variables.”(5) Build-up method illustration only; excludes industry risk premium and specific company risk, if any.(6) Risk-free rate (normalized). The Duff & Phelps recommended ERP as of December 31, 2013 (5.0%) was

developed in relation to a 4.0% “normalized” risk-free rate. The Duff & Phelps recommended ERP should be

used with the risk-free rate that it was developed in relation to, per the schedule provided in Exhibit 3.9 of

the 2014 Valuation Handbook. For more information about normalized risk-free rates, the Duff & Phelps rec-

ommended ERP, and other cost of capital information, see www.DuffandPhelps.com/CostofCapital. (7) Source: 2014 Valuation Handbook – Guide to Cost of Capital (Duff & Phelps, 2014), Risk Premium Report

Study exhibits A-1 (25 portfolios sorted by market capitalization), and A-3 (25 portfolios sorted by 5-year

average net income), and the median of the smoothed risk premia associated with portfolio 25 for each of

the eight measures of size presented in the Risk Premium Report Study exhibits (market value of equity,

book value of equity, 5-year average net income, MVIC, total assets, 5-year average EBITDA, sales, and

number of employees). For each measure of size, 25 portfolios are created (Portfolio 1 is the largest, Port-

folio 25 is the smallest). The “smoothed” average premiums over the risk-free rate are presented here.(8) The ERP Adjustment is needed to account for the difference between the forward-looking ERP as of the val-

uation date that the analyst has selected to use in his or her cost of equity capital calculations, and the his-

torical (1963–present) ERP that was used as a convention in the calculations performed to create the Risk

Premium Report exhibits. In this example, the Duff & Phelps recommended ERP as of this issue’s publica-

tion date is 5.0%, and the 1963–2013 historical ERP used in the calculation of the premia in the 2014 Valua-

tion Handbook’s Risk Premium Report exhibits was 4.9%, implying an ERP adjustment of 0.1% (5.0% -

4.9%). For more information on the ERP adjustment, and to ensure you are using the most up-to-date ERP

and other cost of capital information, visit www.DuffandPhelps.com/CostofCapital.(9) Lawrence H. Officer and Samuel H. Williamson, “Annualized Growth Rate of Various Historical Economic

Series,” www.measuringworth.com, 2014. Inflation as of 2013; GDP as of 2013.(10) Consensus Median Average, Livingston Survey, Federal Reserve Bank of Philadelphia, June 2014, p. 4.

Editor’s Note: I highly recommend that all financial experts who rely on Duff & Phelps data pur-chase the Valuation Handbook and thoroughly understand how the data are compiled and thedata choices available.

Jim Hitchner and Jim Alerding are

pleased to announce their business

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Jim AlERding, CPA/ABV, ASA

founder, Alerding Consulting

indianapolis, in

Documents

and L E93)46 - FSS€¦ · a n d L E93)46 R. James Alerding, ... CVA, CFE Stout Risius Ross, Inc. Stephen J. Bravo, CPA/ABV/PFS, ASA, ... MT, CPA/PFS, CVA Lyons & Seacrest