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Educ
atio
nal M
ater
ials
2010
Grant W. Newton (Presiding Officer)Pepperdine University and AIRA; Medford, Ore.
Moderator: Paul N. ShieldsLECG, LLC; Salt Lake City
Roger J. Grabowski, ASADuff & Phelps LLC; Chicago
Bernard PumpDeloitte Financial Advisory Services, LLP; Chicago
Track BTechnical Valuation Issues
Company-Specifi c Risk Premiums: Application and Methods
2010 Valcon Text Print.indd 492010 Valcon Text Print.indd 49 1/21/10 2:57 PM1/21/10 2:57 PM
American Bankruptcy Institute
51
VA
LC
ON
2010
VA
LC
ON
2010
Co
mp
an
y-S
pecif
ic R
isk P
rem
ium
s:
Ap
pli
ca
tio
n a
nd
Me
tho
ds
Roger
J.
Gra
bow
ski, A
SA
Co-a
uth
or
with S
hannon P
ratt o
f C
ost
of
Capital: A
pplic
ations a
nd E
xam
ple
s,
3rd
ed.
(Wile
y,
Marc
h 2
008)
and 4
th e
d.
(fort
hcom
ing 2
010)
and
Bern
ard
Pum
p,
CP
A,
CD
BV
, C
IRA
Febru
ary
24,
2010
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52
Valcon2010
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2010
Co
st
of
cap
ital
is t
he r
ate
of
retu
rn r
eq
uir
ed
to
co
mp
en
sate
in
vesto
rs f
or
accep
tin
g t
he f
inan
cia
l ri
sk o
f in
vesti
ng
in
a b
usin
ess o
r o
ther
fin
an
cia
l asset
Intr
odu
ctio
n
Larg
e C
om
pany S
tocks
Ibbots
on S
mall
Com
pany
Sto
cks
Mid
-Cap S
tocks
Low
-Cap S
tocks
Mic
ro-C
ap S
tocks
Long-T
erm
Corp
ora
te
Bonds
Long-T
erm
Govern
ment
Bonds
Inte
rmedia
te-T
erm
G
overn
ment
Bonds
Tre
asury
Bill
s
y =
0.4
337x +
0.0
272
R =
0.9
8627
0.0
0%
5.0
0%
10.0
0%
15.0
0%
20.0
0%
25.0
0%
0.0
0%
5.0
0%
10.0
0%
15.0
0%
20.0
0%
25.0
0%
30.0
0%
35.0
0%
40.0
0%
45.0
0%
Total Returns
Ris
k (
Sta
nd
ard
Devia
tio
n o
f R
etu
rns)
Ris
k v
s.
Retu
rn
2
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American Bankruptcy Institute
53
VA
LC
ON
2010
3
Intr
odu
ctio
n
Bu
sin
esses i
n d
istr
ess f
ace u
niq
ue c
hall
en
ges i
n r
ais
ing
cap
ital
Co
mp
an
ies i
n d
istr
ess a
re a
t an
un
su
sta
inab
le c
ap
ital
str
uctu
re
Dis
tress
At
Ris
k
Norm
al
Abili
ty t
o R
ais
e C
apital
Un
sust
ain
able
Cap
ital
Str
uct
ure
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4
CA
PM
Tra
dit
ion
al
CA
PM
E
(r)
= R
(f)
+ B
(ER
P)
CA
PM
assu
mes i
nvesto
rs h
old
well d
ivers
ifie
d p
ort
folio
s
Syste
mati
c r
isk i
s t
he o
nly
“re
levan
t ri
sk” u
nd
er
CA
PM
Mo
dif
ied
CA
PM
(M
CA
PM
)
E
(r)
= R
(f)
+ B
(ER
P)
+ R
P(s
) +
Alp
ha
MC
AP
M i
nclu
des a
dd
itio
nal
ad
justm
en
t fo
r siz
e e
ffect
an
d
un
syste
mati
c (
co
mp
an
y s
pecif
ic)
risk o
r alp
ha
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55
VA
LC
ON
2010
5
Ap
pli
cab
ilit
y o
f H
isto
rica
l B
eta
s o
f G
uid
elin
e C
om
pa
nie
s
His
tori
cal
beta
may n
ot
be a
pp
licab
le f
or
a d
istr
essed
co
mp
an
y
Co
mp
an
y s
pecif
ic r
isks b
eco
me m
ore
sig
nif
ican
t
Sto
ck p
rices o
f d
istr
essed
co
mp
an
ies o
ften
beh
ave e
rrati
call
y
resu
ltin
g i
n n
on
-mean
ing
ful
beta
as m
easu
red
by R
Cau
tio
n m
ust
be u
sed
in
sele
cti
ng
gu
idelin
e c
om
pan
ies a
s t
he
en
tire
in
du
str
y m
ay b
e i
n d
istr
ess
Au
tom
oti
ve I
nd
ustr
y
“H
ealt
hy” c
om
pa
nie
s w
ith
in t
he i
nd
ustr
y m
ay b
e u
sed
, b
ut
an
ad
dit
ion
al
ad
justm
en
t in
th
e a
lph
a f
acto
r fo
r re
str
uctu
rin
g r
isk
may b
e r
eq
uir
ed
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Valcon2010
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2010
Com
pon
ents
of
Ris
k
Syste
mati
c R
isk
Ris
k a
sso
cia
ted
wit
h
ag
gre
gate
mark
et
retu
rns
Measu
red
by B
eta
Ca
nn
ot
be
re
du
ce
d t
hro
ug
h
div
ers
ific
ati
on
Un
syste
mati
c R
isk
Co
mp
an
y S
pecif
ic R
isk
Measu
red
by A
lph
a
Ca
n b
e r
ed
uc
ed
th
rou
gh
div
ers
ific
ati
on
6
6%
94%
Cir
cuit
Cit
y 6
1%
39%
Bes
t B
uy
2010 Valcon Text Print.indd 562010 Valcon Text Print.indd 56 1/21/10 4:42 PM1/21/10 4:42 PM
American Bankruptcy Institute
57
VA
LC
ON
2010
His
tori
cal
R o
f C
ircu
it C
ity
an
d B
est
Bu
y
0%
10%
20%
30%
40%
50%
60%
70%
80%
R
Date
Cir
cu
it C
ity
Best
Bu
y
7
R is t
he p
roport
ion o
f sto
ck p
rice p
erf
orm
ance t
hat
is a
ccounte
d f
or
by t
he p
erf
orm
ance o
f th
e
aggre
gate
mark
et
(as r
epre
sente
d b
y a
suitable
index)
The a
bove c
hart
is b
ased o
n R
valu
es f
rom
rolli
ng t
wo-y
ear
weekly
beta
s o
ver
the p
eriod f
rom
D
ecem
ber
31,
2005 t
hro
ugh D
ecem
ber
11,
2009
Sourc
e:
Blo
om
berg
11/1
0/2
008 –
Circuit C
ity
file
s f
or
Chapte
r 11
bankru
ptc
y p
rote
ction
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ON
2010
8
His
tori
cal
Bet
a
Blo
om
be
rg R
Co
rrela
tio
n c
alc
ula
tio
n f
or
Cir
cu
it C
ity
2010 Valcon Text Print.indd 582010 Valcon Text Print.indd 58 1/21/10 2:57 PM1/21/10 2:57 PM
American Bankruptcy Institute
59
VA
LC
ON
2010
9
His
tori
cal
Bet
a
Blo
om
be
rg R
Co
rrela
tio
n c
alc
ula
tio
n f
or
Best
Bu
y
2010 Valcon Text Print.indd 592010 Valcon Text Print.indd 59 1/21/10 2:57 PM1/21/10 2:57 PM
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2010
10
Res
tru
ctu
rin
g R
isk
Restr
uctu
rin
g R
isk
In
clu
des:
Restr
uctu
rin
g e
xecu
tio
n r
isk
Op
era
tio
nal
risk d
uri
ng
restr
uctu
rin
g
Tw
o t
yp
es o
f fi
nan
cia
lly d
istr
essed
co
mp
an
ies
Go
od
co
mp
an
ies w
ith
bad
bala
nce s
heets
Over-
levera
ge
d,
bu
t o
the
rwis
e o
pe
rati
on
ally
he
alt
hy
Ty
pic
all
y p
rofi
tab
le a
t E
BIT
le
ve
l
Pri
ncip
all
y f
ace
fin
an
cia
l re
str
uc
turi
ng
ris
k
Ve
ry l
ow
pro
ba
bil
ity
th
at
res
ult
of
res
tru
ctu
rin
g w
ill
be
liq
uid
ati
on
Bad
co
mp
an
ies w
ith
bad
bala
nce s
heets
Sig
nif
ica
nt
op
era
tio
na
l p
rob
lem
s i
n a
dd
itio
n t
o b
ein
g o
ve
r-le
ve
rag
ed
Ty
pic
all
y u
np
rofi
tab
le a
t E
BIT
le
ve
l
Pri
ncip
all
y f
ace
op
era
tio
na
l a
nd
fi
na
nc
ial
res
tru
ctu
rin
g r
isk
Mo
de
rate
to
hig
h p
rob
ab
ilit
y t
ha
t re
su
lt o
f re
str
uc
turi
ng
wil
l b
e l
iqu
ida
tio
n
2010 Valcon Text Print.indd 602010 Valcon Text Print.indd 60 1/21/10 2:57 PM1/21/10 2:57 PM
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VA
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ON
2010
11
Addit
ion
al
Un
syst
emati
c R
isks
Key S
up
plier
Dep
en
den
ce
Dep
en
den
ce o
n s
ing
le s
up
plie
r fo
r a
pro
du
ct
or
a f
av
ora
ble
sa
les
arr
an
ge
me
nt
wit
h a
key s
up
pli
er
tha
t w
ou
ld b
e h
ard
to
re
pla
ce
Key C
usto
mer
Ris
k
Sm
all
nu
mb
er
of
cu
sto
me
rs c
on
sti
tute
la
rge
pe
rce
nta
ge
of
sa
les
Cu
sto
mer
may l
oo
k f
or
ne
w s
up
plie
r if
it
be
lie
ve
s s
up
plie
r w
ill
ha
ve
tro
ub
le
de
liv
eri
ng
pro
du
cts
in
tim
ely
ma
nn
er
Key P
ers
on
Dep
en
den
ce
Key e
xecu
tives o
ften
lo
ok
fo
r e
mp
loy
me
nt
at
les
s r
isk
y f
irm
s
Siz
e Sm
all
co
mp
an
ies o
fte
n d
on
’t h
av
e t
he
re
so
urc
es
to
de
al
wit
h f
ina
nc
ial
dis
tre
ss
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LC
ON
2010
12
Addit
ion
al
Un
syst
emati
c R
isks
Lit
iga
tio
n R
isk
Red
ucti
on
in
wo
rkfo
rce r
es
ult
ing
fro
m r
es
tru
ctu
rin
g p
lan
s m
ay
re
su
lt i
n
em
plo
ym
en
t li
tig
ati
on
Lit
iga
tio
n m
ay
ari
se
ou
t o
f in
ab
ilit
y t
o f
ulf
ill
de
liv
ery
of
pro
du
cts
an
d s
erv
ice
s
Sh
are
ho
lder
ag
reem
en
t d
isp
ute
s
Fo
recast
Bia
s
Fo
recasts
may b
e o
ve
rly
op
tim
isti
c o
r o
ve
rly
pe
ss
imis
tic
ba
se
d o
n c
ert
ain
mo
tivati
on
s
Levera
ge R
isk
May b
e f
acto
red
in
to C
os
t o
f C
ap
ita
l th
rou
gh
a l
ev
era
ge
d b
eta
an
d t
he
ap
pro
pri
ate
bo
rro
win
g r
ate
Ind
ustr
y R
isk
Alr
ead
y f
acto
red
in
to C
os
t o
f C
ap
ita
l th
rou
gh
be
ta a
nd
th
e a
pp
rop
ria
te
bo
rro
win
g r
ate
2010 Valcon Text Print.indd 622010 Valcon Text Print.indd 62 1/21/10 2:57 PM1/21/10 2:57 PM
American Bankruptcy Institute
63
VA
LC
ON
2010
Iss
ue
s w
ith
Es
tim
ati
ng
Co
st
of
Eq
uit
y
Ca
pit
al
in T
od
ay
’s E
co
no
my
“Sta
ndard
” m
eth
ods o
f estim
ating C
ost
of
Equity C
apital,
Cost
of
Debt
Capital and t
he W
eig
hte
d A
vera
ge C
ost
of
Capital
that
work
ed in p
eriods o
f sta
bili
ty f
ell
apart
in 2
008 a
nd 2
009.
Com
pany-s
pecific
ris
k a
dju
stm
ents
may b
e a
pplic
able
but
only
if
the b
ase c
om
ponents
of
the c
ost
of
capital are
pro
perly
estim
ate
d.
Com
pany-s
pecific
ris
k a
dju
stm
ents
are
not
substitu
tes o
r c
orr
ections f
or
poorly e
stim
ate
d c
ost
of
capital com
ponents
.
Issu
es:
Eq
uit
y R
isk P
rem
ium
B
eta
esti
mati
on
C
om
pan
y-s
pecif
ic r
isk a
dju
stm
en
ts
D
istr
essed
co
mp
an
y i
ssu
es
13
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64
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ON
2010
Issu
es w
ith
esti
mati
ng
RP
m =
Eq
uit
y R
isk
Pre
miu
m (
ER
P)
•T
he E
RP
, t
he r
ate
of
retu
rn e
xp
ecte
d o
n a
div
ers
ifie
d p
ort
folio
of
com
mon s
tocks in e
xcess o
f th
e r
ate
of
retu
rn o
n a
n
investm
ent
in T
-bonds,
has lik
ely
incre
ased a
s t
he b
road s
tock
mark
et
level has d
eclin
ed.
•
Long-t
erm
stu
dy o
f re
aliz
ed p
rem
ium
s in e
xcess o
f th
e r
etu
rn o
n
T-b
onds indic
ate
s t
hat
realiz
ed p
rem
ium
s,
on
the a
vera
ge,
have
decre
ased a
s t
he T
-bond y
ield
s d
ecre
ase.
M
orn
ingsta
r S
BB
I H
isto
ric E
RP
at
end o
f 2007 =
7.1
%
at
en
d o
f 2
00
8 =
6.5
%
•B
ut
these a
re n
ot
ord
inary
tim
es.
If o
ne s
imply
adds a
n e
stim
ate
of
the E
RP
derived d
uring “
norm
al” e
conom
ic t
imes t
o t
he “
spot”
yie
ld o
n 2
0-y
ear
T-b
onds o
n D
ecem
ber
31,
2008,
one w
ill lik
ely
arr
ive a
t to
o low
of
an e
stim
ate
of
the c
ost
of
equity c
apital.
14
2010 Valcon Text Print.indd 642010 Valcon Text Print.indd 64 1/21/10 2:57 PM1/21/10 2:57 PM
American Bankruptcy Institute
65
VA
LC
ON
2010 Fo
rward
-Lo
okin
g E
RP
esti
mate
s –
“T
op
Do
wn
”
Gra
ham
and H
arv
ey,
“Expecta
tions o
f E
quity R
isk P
rem
ia,
Vola
tilit
y a
nd
Asym
metr
y f
rom
a C
orp
ora
te F
inance P
ers
pective,”
work
ing p
aper
(July
2003);
“T
he E
quity R
isk P
rem
ium
am
id a
Glo
bal F
inancia
l C
risis
,” w
ork
ing p
aper
(May 2
009);
update
d q
uart
erly b
y D
uke C
FO
O
utlook S
urv
ey (
ww
w.c
fosurv
ey.o
rg).
Estim
ate
expecte
d r
isk p
rem
ium
on m
ulti-year
surv
ey o
f C
FO
s.
Follo
wed u
p w
ith c
ontinuin
g q
uart
erly s
urv
eys:
–S
urv
ey a
ttra
cts
about
400 r
espondents
(10%
fro
m c
om
panie
s
with less t
han $
10 m
illio
n in r
evenue;
50%
fro
m c
om
panie
s
with less t
han $
500 m
illio
n in r
evenue;
40%
are
private
com
panie
s)
–A
sk f
or
1-y
ear
and 1
0-y
ear
risk p
rem
ia (
expecte
d r
etu
rn o
n
S&
P 5
00;
pre
miu
m c
alc
ula
ted o
ver
10-y
ear
Tre
asury
bond)
Estim
ate
at
begin
nin
g o
f 2009:
4.8
% a
rith
avg.
– h
ighest
sin
ce 2
001
15
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Valcon2010
VA
LC
ON
2010 Fo
rward
-Lo
okin
g E
RP
esti
mate
s–
“T
op
Do
wn
”
16
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American Bankruptcy Institute
67
VA
LC
ON
2010 Fo
rward
-Lo
okin
g E
RP
esti
mate
s –
“T
op
Do
wn
”
17
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Valcon2010
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LC
ON
2010
Issu
es w
ith
esti
mati
ng
ER
P
The e
vid
ence p
resente
d [
that
the long-r
un E
RP
is b
etw
een 3
.5%
and 6
%]
repre
sents
a long-t
erm
avera
ge o
r unconditio
nal estim
ate
of
the E
RP
.
That
is,
what
is a
reasonable
range o
f E
RP
that
can b
e e
xpecte
d o
ver
an e
ntire
busin
ess c
ycle
?
Where
in t
his
range is t
he c
urr
ent
ER
P?
Researc
h h
as s
how
n t
hat
ER
P is c
yclic
al during t
he b
usin
ess c
ycle
.
We u
se t
he t
erm
“conditio
nal E
RP
” to
mean t
he E
RP
that
reflects
curr
ent
mark
et
conditio
ns.
For
exam
ple
, w
hen t
he e
conom
y is n
ear
or
in r
ecessio
n (
and r
eflecte
d in r
ecent
rela
tively
low
retu
rns o
n s
tocks),
th
e c
onditio
nal E
RP
is m
ore
lik
ely
at
the h
igher
end o
f th
e r
ange.
When
the e
conom
y im
pro
ves (
with e
xpecta
tions o
f im
pro
vem
ents
reflecte
d in
recent
incre
asin
g s
tock r
etu
rns),
the c
onditio
nal E
RP
moves t
ow
ard
the
mid
-poin
t of
the r
ange.
When t
he e
conom
y is n
ear
its p
eak (
and
reflecte
d in r
ecent
rela
tively
hig
h s
tock r
etu
rns),
the c
onditio
nal E
RP
is
more
lik
ely
at
the low
er
end o
f th
e r
ange.
Pra
tt a
nd G
rabow
ski, C
ost
of
Capital: A
pplic
ations a
nd E
xam
ple
s 3
rd e
d,
Chapte
r 9.
18
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American Bankruptcy Institute
69
VA
LC
ON
2010
Co
nd
itio
nal
ER
P E
sti
mate
at
Peak o
f S
tock
Mark
et
Cycle
: E
RP
belo
w a
vera
ge
19
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Valcon2010
VA
LC
ON
2010
Co
nd
itio
nal
ER
P E
sti
mate
at
Tro
ug
h o
f
Sto
ck M
ark
et
Cycle
: E
RP
ab
ove a
vera
ge
20
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American Bankruptcy Institute
71
VA
LC
ON
2010
Imp
lied
ER
P e
sti
mate
s b
en
ch
mark
ed
ag
ain
st
actu
al
an
d
no
rmalized
20-y
ea
r U
.S.
go
vern
men
t b
on
d y
ield
s (
sh
ou
ld b
e
co
mp
are
d t
o g
eo
metr
ic a
vg
of
realized
ris
k p
rem
ium
s)
Sourc
e: Q
uantita
tive P
rofile
s a
nd w
ww
.dam
odara
n.c
om
and D
uff &
Phelp
s
calc
ula
tions
Sourc
e:
Shannon P
ratt a
nd R
oger
Gra
bow
ski, C
ost
of
Capital 4th
ed (
Wile
y, 2
010)
21
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Valcon2010
VA
LC
ON
2010
Issu
es w
ith
Measu
rin
g B
eta
In t
heory
, B
eta
equals
:
c
ov(R
s,R
m)
var(
Rm
) w
here
:
s
= E
xpecte
d B
eta
of
the s
tock o
f com
pany “
s”
Co
v(R
s,R
m)
= E
xpecte
d c
ovariance b
etw
een t
he e
xcess
retu
rn (
Rs-R
f) o
n s
ecurity
“s”
and
t
he e
xcess m
ark
et
retu
rn (
Rm
-Rf)
Var(
Rm
) =
Expecte
d v
ariance o
f excess r
etu
rn o
n t
he
overa
ll sto
ck m
ark
et
Covariance m
easure
s t
he d
egre
e t
o w
hic
h t
he r
etu
rn o
n a
part
icula
r s
ecurity
and t
he o
vera
ll m
ark
et’s r
etu
rn m
ove t
ogeth
er
In p
ractice,
these f
orw
ard
variable
s a
re e
stim
ate
d u
sin
g h
isto
rical data
over
a “
look-b
ack”
period.
s =
22
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American Bankruptcy Institute
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VA
LC
ON
2010
Inte
rpre
tati
on
of
Beta
–
co
rrela
tio
n v
s.
rela
tive v
ola
tility
Let
=
s,m
/ [
s *
m
] =
co
rrela
tio
n c
oeff
icie
nt
betw
een t
he r
etu
rns o
n t
he s
ecurity
, s. and t
he m
ark
et,
m,
then
s =
*
[s /
m
]
Issue:
Does b
eta
com
e p
rim
arily
fro
m c
orr
ela
tions o
f sto
ck r
etu
rns w
ith t
he
mark
et
index (
i.e.,
) or
Does b
eta
com
e p
rim
arily
fro
m t
he r
ela
tive r
etu
rn v
ola
tilit
ies [
s /
m
] o
r
Fro
m o
ther
sourc
e a
s w
ell?
The f
orm
ula
for
sta
ndard
beta
mix
es t
ogeth
er
rela
tive v
ola
tilit
y a
nd
corr
ela
tion.
A low
beta
could
actu
ally
repre
sent
a h
igh r
ela
tive v
ola
tilit
y t
hat
is m
asked b
y a
low
corr
ela
tion.
Investo
rs w
ould
be m
isle
d into
thin
kin
g t
hey h
ad s
ele
cte
d a
n investm
ent
whose v
ola
tilit
y is low
.
23
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Valcon2010
VA
LC
ON
2010 In
terp
reta
tio
n o
f B
eta
- c
orr
ela
tio
n
(c
on
t’d
)
Covariance is n
ot
vola
tilit
y
Covariance is a
measure
of
their t
endency t
o v
ary
in t
he s
am
e w
ay a
nd in t
he s
am
e r
ela
tive a
mounts
Positiv
e c
orr
ela
tion:
do larg
e v
alu
es o
f one v
ariable
tend t
o b
e a
ssocia
ted w
ith larg
e v
alu
es o
f th
e o
ther
variable
or
sm
all
valu
es o
f one v
ariable
tend t
o b
e a
ssocia
ted w
ith s
mall
valu
es o
f th
e o
ther
– w
heth
er
negative o
r positiv
e
Negative c
orr
ela
tion:
do larg
e v
alu
es o
f one v
ariable
tend t
o b
e a
ssocia
ted w
ith s
mall
valu
es o
f th
e o
ther
– d
oes n
ot
require t
hat
one v
alu
e b
e n
egative w
hile
the o
ther
is p
ositiv
e
24
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LC
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2010
Beta
Measu
rem
en
t fo
r T
rad
ed
Assets
Usin
g
His
tori
cal
Data
over
Lo
ok-b
ack p
eri
od
Rs –
Rf =
s +
s x
(R
m –
Rf) +
s
R
s
= R
etu
rn o
n s
ecurity
“s”
R
f =
Ris
k-f
ree r
ate
s
= R
egre
ssio
n c
onsta
nt
s
= E
stim
ate
d b
eta
of
security
“s”
based o
n h
isto
rical data
R
m
= H
isto
rical re
turn
on M
ark
et
Port
folio
s
= R
egre
ssio
n e
rror
term
Beta
Estim
ation I
ssue
s:
Appro
priate
Mark
et
Port
folio
pro
xy
Am
ount
of
his
tory
Incre
menta
l tim
e inte
rval
25
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Valcon2010
VA
LC
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2010
Beta
Measu
rem
en
t -
Levere
d v
s.
Un
levere
d
Beta
s
Theory
: Com
pany r
isk c
om
prised o
f opera
ting r
isk a
nd f
inancia
l risk
(le
vera
ge)
More
levera
ge m
eans m
ore
ris
k (
hig
her
beta
)
Pro
ble
m:
Public
ly t
raded g
uid
elin
e o
r com
para
ble
com
panie
s m
ay h
ave
levera
ge t
hat
diffe
rs f
rom
our
subje
ct
com
pany
Solu
tion:
“Unle
ver”
the g
uid
elin
e o
r com
para
ble
com
panie
s b
eta
s
–R
em
ovin
g t
he e
ffect
of
financia
l le
vera
ge leaves t
he e
ffect
of
opera
ting r
isk o
nly
– u
nle
vere
d b
eta
often t
erm
ed “
asset
beta
”.
“Rele
ver”
estim
ate
d u
nle
vere
d b
eta
to r
eflect
levera
ge o
f subje
ct
com
pany
26
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American Bankruptcy Institute
77
VA
LC
ON
2010
Beta
Measu
rem
en
t -
Levere
d v
s.
Un
levere
d
Beta
s (
co
nt’
d)
Basic
rela
tio
nsh
ip u
nd
erl
yin
g f
orm
ula
s f
or
un
leveri
ng
/rele
veri
ng
beta
V
alu
e o
f a L
evere
d F
irm
Assets
Cap
ital
Va
lue
of
Va
lue
of
Un
levere
d
Deb
t
Fir
m
Ca
pit
al
plu
s
p
lus
Va
lue
of
Va
lue
of
Ta
x S
hie
ld
Eq
uit
y
C
ap
ital
In t
his
fo
rmu
lati
on
, th
e c
os
t o
f d
eb
t c
ap
ita
l is
me
as
ure
d p
rio
r to
th
e t
ax
aff
ect
becau
se t
he
valu
e o
f th
e t
ax d
ed
ucti
on
on
th
e i
nte
rest
paym
en
ts e
qu
als
th
e v
alu
e o
f th
e t
ax s
hie
ld.
27
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Valcon2010
VA
LC
ON
2010
Beta
Measu
rem
en
t -
Levere
d/U
nle
vere
d
/Rele
vere
d F
orm
ula
e
Ham
ada,
“The E
ffect
of
the F
irm
’s C
apital S
tructu
re o
n t
he S
yste
matic
Ris
k o
f C
om
mon S
tocks,”
Journ
al of
Fin
ance
27(2
) (1
972).
28
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American Bankruptcy Institute
79
VA
LC
ON
2010
Beta
Measu
rem
en
t -
Levere
d/U
nle
vere
d/R
ele
vere
d
Fo
rmu
lae
(c
on
t’d
)
The H
am
ada f
orm
ula
s a
re c
onsis
tent
with t
heory
that:
Dis
count
rate
used t
o c
alc
ula
te t
he t
ax s
hie
ld e
quals
the c
ost
of
debt
capital
(i.e., t
he t
ax s
hie
ld h
as s
am
e r
isk a
s d
ebt)
.
Debt
capital has n
eglig
ible
ris
k t
hat
inte
rest
paym
ents
and p
rincip
al
repaym
ents
will
not
be m
ade w
hen o
wed w
hic
h infe
rs t
ax d
eductions o
n t
he
inte
rest
expense w
ill b
e r
ealiz
ed in t
he p
eriod in w
hic
h t
he inte
rest
is p
aid
(i.e., b
eta
of
debt
capital equals
zero
).
Valu
e o
f th
e t
ax s
hie
ld is p
roport
ionate
to t
he v
alu
e o
f th
e m
ark
et
valu
e o
f debt
capital (i.e
., v
alu
e o
f ta
x s
hie
ld
).
But
the H
am
ada f
orm
ula
s a
re b
ased u
pon M
odig
liani and M
iller's f
orm
ula
tion
of
the t
ax s
hie
ld v
alu
es f
or
consta
nt
debt. T
he
fo
rmu
la i
s n
ot
co
rre
ct
if t
he
assu
mp
tio
n i
s t
hat
deb
t cap
ital
rem
ain
s a
t a c
on
sta
nt
perc
en
tag
e o
f e
qu
ity
ca
pit
al
(eq
uiv
ale
nt
to d
eb
t in
cre
as
ing
in
pro
po
rtio
n t
o n
et
ca
sh
flo
w t
o t
he f
irm
in
every
peri
od
).[1
] T
he f
orm
ula
s a
re o
ften w
rongly
assum
ed t
o h
old
in g
enera
l.
[1]
Arz
ac,
Enrique R
., a
nd L
aw
rence R
. G
loste
n.
“A R
econsid
era
tion o
f T
ax S
hie
ld V
alu
ation.”
Euro
pean
Fin
ancia
l M
anagem
ent
(2005):
453-4
61.
Sourc
e:
Shannon P
ratt a
nd R
oger
Gra
bow
ski, C
ost
of
Capital: A
pplic
ations a
nd E
xam
ple
s,
3rd
ed.
(John W
iley &
Sons,
Marc
h 2
008).
Use
d w
ith
perm
issio
n.
All
Rig
hts
Reserv
ed.
29
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80
Valcon2010
VA
LC
ON
2010
Beta
Measu
rem
en
t -
Levere
d/U
nle
vere
d/R
ele
vere
d
Fo
rmu
lae
(c
on
t’d
)
Mile
s a
nd E
zzell,
“T
he W
eig
hte
d A
vera
ge C
ost
of
Capital, P
erf
ect
Capital M
ark
ets
, and P
roje
ct
Life:
a C
larification,”
Journ
al of
Fin
ancia
l and Q
uantita
tive A
naly
sis
(S
ept
1980)
pp 7
19-7
30.
Intr
oduces b
eta
for
debt
capital
30
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American Bankruptcy Institute
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VA
LC
ON
2010
Beta
Measu
rem
en
t -
Levere
d/U
nle
vere
d/R
ele
vere
d
Fo
rmu
lae
(c
on
t’d
)
The M
iles E
zzell
form
ula
s a
re c
onsis
tent
with t
he t
heory
that:
Dis
count
rate
used t
o c
alc
ula
te t
he t
ax s
hie
ld e
quals
the c
ost
of
debt
capital
(i.e., t
he t
ax s
hie
ld h
as s
am
e r
isk a
s d
ebt)
during t
he f
irst
year
and t
he
dis
count
rate
used t
o c
alc
ula
te t
he t
ax s
hie
ld t
here
after
equals
the c
ost
of
equity c
alc
ula
ted u
sin
g t
he a
sset
beta
of
the f
irm
(i.e., t
he r
isk o
f th
e t
ax
shie
ld a
fter
the f
irst
year
is c
om
para
ble
to t
he r
isk o
f th
e o
pera
ting c
ash
flo
ws).
That
is,
the r
isk o
f re
aliz
ing t
he t
ax d
eductions is g
reate
r th
an
assum
ed in t
he H
am
ada f
orm
ula
s.
Debt
capital is
bearing r
isk o
f variabili
ty o
f opera
ting n
et
cash f
low
in t
hat
inte
rest
paym
ents
and p
rincip
al re
paym
ents
may n
ot
be m
ade w
hen o
wed
whic
h infe
rs t
ax d
eductions o
n t
he inte
rest
expense m
ay n
ot
be r
ealiz
ed in
the p
eriod in w
hic
h t
he inte
rest
is p
aid
(i.e., b
eta
of
debt
capital m
ay b
e g
reate
r th
an z
ero
).
Mark
et
valu
e o
f debt
capital re
main
s a
t a c
onsta
nt
perc
enta
ge o
f equity
capital w
hic
h is e
quiv
ale
nt
that
debt
incre
ases in p
roport
ion t
o t
he n
et
cash
flo
w o
f th
e f
irm
(net
cash f
low
to investe
d c
apital) in e
very
period.
Sourc
e:
Shannon P
ratt a
nd R
oger
Gra
bow
ski, C
ost
of
Capital: A
pplic
ations a
nd E
xam
ple
s,
3rd
ed.
(John W
iley &
Sons,
Marc
h 2
008).
Used w
ith
perm
issio
n.
All
Rig
hts
Reserv
ed.
31
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VA
LC
ON
2010
Beta
Measu
rem
en
t -
Levere
d/U
nle
vere
d/R
ele
vere
d
Fo
rmu
lae
(c
on
t’d
)
Textb
ook f
orm
ula
s a
ssum
e lin
ear
rela
tionship
betw
een
incre
ases in levera
ge a
nd c
ost
of
equity c
apital
Reasonable
for
low
er
levels
of
debt
Rela
tionship
bre
aks d
ow
n w
ith h
igh levels
of
debt
(fin
ancia
l d
istr
ess)
32
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American Bankruptcy Institute
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2010
Textb
oo
k R
ela
tio
nsh
ip B
etw
een
Levere
d
Eq
uit
y B
eta
an
d U
nle
vere
d A
sset
Beta
33
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2010
Beta
as a
Fu
ncti
on
of
Levera
ge
(Ex
hib
it 1
4.5
Co
st
of
Ca
pit
al
3rd
ed
)
The r
eal w
orld is m
ore
com
plic
ate
d t
han t
he t
extb
ook m
odels
. T
his
fig
ure
depic
ts t
he r
ela
tionship
betw
een levera
ge a
nd t
he b
eta
of
a f
irm
’s d
ebt, e
quity,
and t
he w
eig
hte
d a
vera
ge b
eta
with
tax b
enefits
and c
osts
of
financia
l dis
tress.
Levera
ge is d
efined a
s t
he m
ark
et
valu
e o
f debt
div
ided b
y t
he t
ota
l m
ark
et
valu
e o
f th
e f
irm
. B
d is
the b
eta
of
the c
om
pany’s
debt
and B
e is
th
e b
eta
of
the f
irm
’s e
quity.
The u
nle
vere
d a
sset
beta
is a
ssum
ed e
qual to
1.
W
eig
hte
d a
vera
ge b
eta
of
equity a
nd d
ebt
Bd
Be
Sourc
e:
Art
hur
G.
Kort
ew
eg,
“The C
osts
of
Fin
ancia
l D
istr
ess a
cro
ss I
ndustr
ies,”
Work
ing p
aper
Sta
nfo
rd U
niv
ers
ity (
January
15,
2007):
65.
Used w
ith p
erm
issio
n.
All
rights
reserv
ed.
06 F
rom
Shannon P
ratt a
nd R
oger
Gra
bow
ski, C
ost
of
Capital: A
pplic
ations
and E
xam
ple
s,
3rd
ed.
(John W
iley &
Sons,
Marc
h 2
008).
Used w
ith p
erm
issio
n.
All
Rig
hts
Reserv
ed.
34
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American Bankruptcy Institute
85
VA
LC
ON
2010
Deb
t B
etas
by
Bon
d R
ati
ng
Decem
ber
2008
Au
gu
st
2009
Aaa
0.1
2
0.2
2
Aa
0.1
7
0.2
4
A
0.3
5
0.3
6
Baa
0.4
2
0.4
1
Ba
0.6
8
0.5
8
B
0.7
7
0.6
9
Caa
1.1
1
1.0
3
Ca-D
1.5
0
1.4
9
35
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86
Valcon2010
VA
LC
ON
2010
Issu
es w
ith
esti
mati
ng
:
usin
g r
etu
rns d
uri
ng
lo
ok-b
ack
pe
rio
d w
he
n r
ela
tio
ns
hip
to
ma
rke
t is
ch
an
gin
g
While
such a
dju
stm
ents
in p
ricin
g o
ccur
for
som
e s
tocks d
uring a
ll tim
e
periods,
over
these p
ast
few
month
s w
e h
ave s
een t
he s
tock m
ark
et
(as
repre
sente
d b
y t
he S
&P
500
for
exam
ple
) experience a
majo
r re
-pricin
g led
by f
inancia
l secto
r sto
cks a
nd h
ighly
levera
ged n
on-f
inancia
l sto
cks.
Sto
cks
of
com
panie
s w
ith t
raditio
nally
hig
h o
pera
ting levera
ge (
opera
ting incom
e
and p
rices m
ovin
g u
p f
aste
r th
an t
he o
vera
ll m
ark
et
during u
pw
ard
mark
et
price m
ovem
ents
, and m
ovin
g d
ow
n f
aste
r th
an t
he m
ark
et
when t
he
mark
et
declin
es)
appear
to indic
ate
that
opera
ting levera
ge h
as d
ecre
ased
when in f
act
their u
nderlyin
g o
pera
ting levera
ge h
as n
ot
changed.
Lookin
g a
t exam
ple
on n
ext
slid
e.
In p
eriod A
, th
e s
am
ple
com
pany
essentially
moves w
ith t
he m
ark
et.
In p
eriod B
, th
e s
am
ple
com
pany is
experiencin
g a
dow
nw
ard
re-p
ricin
g,
and d
uring t
his
period t
he s
am
ple
com
pany’s
retu
rns a
re n
ot
as s
trongly
corr
ela
ted w
ith t
he m
ovem
ent
of
the
overa
ll m
ark
et.
In P
eriod C
, th
e r
e-p
ricin
g o
f th
e s
am
ple
com
pany is
com
ple
te,
and t
he s
am
ple
com
pany’s
retu
rns a
re o
nce a
gain
movin
g in
tandem
with m
ark
et
retu
rns.
36
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American Bankruptcy Institute
87
VA
LC
ON
2010
Pri
cin
g A
dju
stm
en
t fo
r a H
yp
oth
eti
cal
Co
mp
an
y
37
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88
Valcon2010
VA
LC
ON
2010
Issu
es w
ith
esti
mati
ng
:
us
ing
re
turn
s d
uri
ng
lo
ok
-
back p
eri
od
wh
en
rela
tio
nsh
ip t
o m
ark
et
is c
han
gin
g
If o
ne w
ere
to c
om
pute
beta
at
Tim
e 1
, w
hic
h inclu
des p
eriod
“A”
as t
he “
look-b
ack”
period,
the b
eta
estim
ate
would
reflect
the
norm
al re
lationship
betw
een t
he s
am
ple
com
pany’s
retu
rns in
the m
ark
et’s r
etu
rns.
In c
ontr
ast, c
om
puting a
beta
estim
ate
at
Tim
e 2
, w
hic
h inclu
des p
eriod “
B”
(the s
am
ple
com
pany’s
re-
pricin
g b
y t
he m
ark
et)
as t
he “
look-b
ack”
period,
would
not
yie
ld
a r
elia
ble
forw
ard
-lookin
g b
eta
estim
ate
. In
fact, it
would
yie
ld a
beta
estim
ate
low
er
than e
xpecte
d s
ince t
he s
am
ple
com
pany’s
re
turn
was n
egative in a
period w
hen t
he m
ark
et
was g
enera
lly
risin
g.
This
result is c
ounte
r-in
tuitiv
e g
iven t
he s
am
ple
com
pany’s
dow
nw
ard
re-p
ricin
g,
i.e., t
he o
pera
ting r
isk o
f th
e
sam
ple
com
pany h
as n
ot
declin
ed o
ver
period “
B”
and w
ill
resum
e its
“norm
al” r
ela
tionship
to t
he m
ark
et
in p
eriod “
C.”
38
2010 Valcon Text Print.indd 882010 Valcon Text Print.indd 88 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
89
VA
LC
ON
2010
Co
mp
an
y-S
pecif
ic R
isk A
dju
stm
en
t
Adju
sting b
uild
-up m
eth
od f
or
Industr
y R
isk P
rem
ia
Judgm
ent
Estim
ate
“cost-
to-c
ure
” risk a
nd a
dju
st
expecte
d c
ash f
low
s
Tota
l B
eta
Directly m
easure
ris
k u
sin
g D
&P
Ris
k P
rem
ium
Report
-Ris
k s
tud
y:
Opera
ting m
arg
in
CV
(opera
ting m
arg
in)
CV
(re
turn
on
equity)
39
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90
Valcon2010
VA
LC
ON
2010
Ind
ustr
y R
isk P
rem
ia
SB
BI
report
s In
du
str
y R
isk P
rem
ia (
IRP
) fo
r alm
ost
300 industr
ies a
t t
he 2
and 3
dig
it S
IC C
ode level.
Ris
k i
nd
ex f
or
ind
ustr
y =
Fu
ll I
nfo
rma
tio
n B
eta
(F
I-b
eta
)
IR
P =
(F
I-b
eta
x E
RP
) – E
RP
Uses S
BB
I’s h
isto
rical re
aliz
ed r
isk p
rem
ium
for
ER
P
E
xam
ple
: F
ood S
tore
s I
ndustr
y,
SIC
54
IR
P=
(.8
4 x
7.1
) – 7
.1 =
-1.1
7%
SB
BI
Valu
ation E
ditio
n h
as instr
uctions o
n h
ow
to d
ow
nlo
ad t
he c
urr
ent
Industr
y P
rem
ia C
om
pany L
ist
Report
.
You c
an m
ake a
dju
stm
ents
either
directly o
r to
the industr
y p
rem
ium
:
Change E
RP
estim
ate
based o
n h
isto
ry t
o e
xpecte
d E
RP
, o
r
Change b
eta
to a
ccount
for
any d
iffe
rences in industr
y b
etw
een t
he
subje
ct
com
pany a
nd t
he p
ublis
hed p
rem
ium
.
40
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American Bankruptcy Institute
91
VA
LC
ON
2010
Ind
ustr
y R
isk P
rem
ia (
co
nt’
d)
41
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92
Valcon2010
VA
LC
ON
2010
Usin
g I
nd
ustr
y R
isk P
rem
ia i
n C
on
jun
cti
on
wit
h y
ou
r esti
mate
of
ER
P
For
exam
ple
, assum
e t
hat
the s
ubje
ct S
BB
I IR
P e
quale
d -
2.1
9%
.[1]
This
is c
onsis
tent
with t
he 7
.05%
his
torical risk
pre
miu
m u
sed t
o c
alc
ula
te t
he S
BB
I IR
P a
s o
f 2
00
7.
We
ca
n t
hen d
ete
rmin
e a
n industr
y r
isk p
rem
ium
for
that
SIC
code
consis
tent
with y
our
ER
P e
stim
ate
as f
ollo
ws:
New
IR
P =
SB
BI
IRP
x (
New
ER
P e
stim
ate
/ S
BB
I his
torical E
RP
estim
ate
)
[1]
SIC
code 5
91,
Dru
g S
tore
s a
nd P
roprieta
ry s
tore
s, S
BB
I V
alu
ation E
ditio
n 2
008 Y
earb
ook,
p.
51
.
42
2010 Valcon Text Print.indd 922010 Valcon Text Print.indd 92 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
93
VA
LC
ON
2010
Cri
ticis
ms
of
Co
mp
an
y-S
pecif
ic R
isk
Ad
justm
en
t
Com
pany-s
pecific
ris
k a
dju
stm
ent
inte
nded t
o a
ccount
for
com
pany s
pecific
facto
rs a
ffecting c
om
pany’s
com
petitive p
ositio
n in t
he industr
y
Accord
ing t
o C
AP
M
– u
nanticip
ate
d e
vents
arisin
g f
rom
com
pany-s
pecific
ris
k f
acto
rs w
ill a
ffect
price o
f sto
ck t
hro
ugh e
xpecte
d f
utu
re c
ash f
low
s
Accord
ing t
o C
AP
M –
only
syste
matic r
isk w
ill a
ffect
equity d
iscount
rate
s
Dis
count
rate
s s
hould
be a
pplie
d t
o e
xpecte
d c
ash f
low
s
Bre
ale
y a
nd M
yers
, P
rincip
les o
f C
orp
ora
te F
inance,
critique:
“M
anagers
[appra
isers
] often a
dd f
udge f
acto
rs t
o d
iscount
rate
s…
This
sort
of
adju
stm
ent
makes u
s n
erv
ous.
…th
e n
eed f
or
a d
iscount
rate
adju
stm
ent
usually
arises b
ecause m
anagers
[appra
isers
] fa
il to
giv
e b
ad o
utc
om
es
their d
ue w
eig
ht
in c
ash f
low
fore
casts
. T
he m
anagers
[appra
isers
] th
en t
ry t
o o
ffset
that
mis
take b
y a
ddin
g a
fudge f
acto
r to
the d
iscount
rate
.” (
bra
ckets
adde
d)
43
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94
Valcon2010
VA
LC
ON
2010
Cri
ticis
ms o
f C
om
pan
y-S
pecif
ic R
isk
Ad
jus
tme
nt
(co
nt’
d)
Dela
ware
Open M
RI
Radio
logy A
ssocia
tes,
P.A
.
v.
How
ard
B.
Kessle
r et
al. (
Court
of
Chancery
of
Sta
te o
f D
ela
ware
, C
ons C
.A.
No.
275-N
)
“Much m
ore
here
tical to
CA
PM
, how
ever,
the b
uild
-up m
eth
od
typic
ally
incorp
ora
tes h
eavy d
ollo
ps o
f w
hat
is c
alle
d “
com
pany
-specific
ris
k,”
the
very
sort
of
unsyste
matic r
isk t
hat
the C
AP
M b
elie
ves is n
ot
rew
ard
ed b
y t
he c
apital m
ark
ets
and s
hould
not
be
consid
ere
d in c
alc
ula
ting a
cost
of
capital. T
he c
alc
ula
tion o
f a
com
pany s
pecific
ris
k is h
ighly
subje
ctive a
nd o
ften is justified a
s a
way o
f ta
kin
g into
account
com
petitive a
nd o
ther
facto
rs t
hat
endanger
the s
ubje
ct
com
pany’s
abili
ty t
o a
chie
ve its
pro
jecte
d c
ash
flo
ws.
In o
ther
word
s,
it is o
ften a
back-d
oor
meth
od o
f re
ducin
g e
stim
ate
d c
ash f
low
s r
ath
er
than a
dju
sting t
hem
directly.”
44
2010 Valcon Text Print.indd 942010 Valcon Text Print.indd 94 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
95
VA
LC
ON
2010
Cri
ticis
ms o
f C
om
pan
y-S
pecif
ic R
isk
Ad
jus
tme
nt
(co
nt’
d)
Dela
ware
Open M
RI
Radio
logy A
ssocia
tes (
cont’d)
“To judges,
the c
om
pany s
pecific
ris
k p
rem
ium
often s
eem
s lik
e t
he d
evic
e e
xpert
s e
mplo
y t
o b
ring t
heir f
inal re
sults into
lin
e w
ith t
heir c
lients
’ obje
ctives,
when o
ther
valu
ation inputs
fail
to d
o t
he t
rick…
(petitioners
’ expert
’s)
ow
n a
naly
sis
als
o c
onta
ins a
subje
ctive
specific
ris
k p
rem
ium
of
2%
, th
e q
uantification o
f w
hic
h c
annot
be e
xpla
ined b
y r
efe
rence t
o o
bje
ctive f
acto
rs.
I w
ill n
ot
quib
ble
with inclu
din
g t
hat
facto
r, w
hic
h r
ein
forc
es t
he
conserv
atism
of
(petitioners
’ expert
’s)
final cost
of
capital.”
i.e., t
he incre
ase in t
he c
ost
of
capital re
duced t
he F
air V
alu
e c
laim
ed b
y p
etitioner.
45
2010 Valcon Text Print.indd 952010 Valcon Text Print.indd 95 1/21/10 2:58 PM1/21/10 2:58 PM
96
Valcon2010
VA
LC
ON
2010
Cri
ticis
ms o
f C
om
pan
y-S
pecif
ic R
isk
Ad
jus
tme
nt
(co
nt’
d)
To b
e c
onsis
tent
with C
AP
M a
nd o
ther
asset
pricin
g m
odels
, s
pecific
ris
ks (
e.g
., lack o
f m
anagem
ent
depth
) should
be
addre
ssed in a
rriv
ing a
t expecte
d c
ash f
low
s –
diffe
rent
cash
flo
w s
cenarios w
eig
hte
d b
y p
robabili
ty o
f re
aliz
ing t
hat
cash
flo
w.
But
this
fails
to a
ccount
for
the p
ossib
le incre
ased
variance in p
ossib
le c
ash f
low
outc
om
es –
that
is,
are
the
expecte
d c
ash f
low
s (
mean o
f th
e d
istr
ibution)
of
the larg
er,
public
com
para
ble
com
panie
s s
ubje
ct
to less v
ariance t
han a
re t
he e
xpecte
d c
ash f
low
s o
f a s
ubje
ct
sm
alle
r private
com
pany?
Altern
ative t
o a
dju
sting d
iscount
rate
: quantify
“cost
to c
ure
”
Som
e c
ite v
entu
re c
apital re
turn
s is e
vid
ence o
f hig
h r
ate
s o
f r
etu
rn –
but
those r
etu
rns a
re e
xpecte
d o
ver
short
tim
e f
ram
es
(not
long-t
erm
)
46
2010 Valcon Text Print.indd 962010 Valcon Text Print.indd 96 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
97
VA
LC
ON
2010
Do
es B
eta
Alo
ne M
easu
re R
isk o
r D
oes
Un
syste
mati
c R
isk C
ou
nt
Econom
ic t
heory
pre
dic
ts t
hat
the r
ela
tion b
etw
een idio
syncra
tic
ris
k a
nd e
xpecte
d r
etu
rns d
epends o
n t
he e
xte
nt
to w
hic
h investo
rs h
old
div
ers
ifie
d p
ort
folio
s
The less d
ivers
ifie
d t
he p
ort
folio
, th
e h
igher
the p
roport
ion o
f idio
syncra
tic r
isk r
eflecte
d in e
xpecte
d r
etu
rns
In s
om
e m
odels
(e.g
., t
extb
ook C
AP
M)
investo
rs a
re a
ssum
ed
to h
old
fully
-div
ers
ifie
d p
ort
folio
s in f
rictionle
ss m
ark
ets
But
mark
et
fric
tions (
info
rmation a
nd t
ransaction c
osts
) and
investo
r chara
cte
ristics (
incom
e levels
, risk p
refe
rences,
behavio
ral bia
ses)
can c
ause investo
rs t
o u
nder-
div
ers
ify
Researc
h h
as s
how
n t
hat
idio
syncra
tic r
isk is p
riced b
y t
he
mark
et
wheth
er
investo
rs a
re f
ully
div
ers
ifie
d o
r not.
47
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98
Valcon2010
VA
LC
ON
2010
Stu
die
s o
f M
ark
et
Pri
cin
g o
f C
om
pan
y-
Sp
ecif
ic R
isk
Em
piric
al stu
die
s o
f com
pany s
pecific
ris
k,
RP
u, b
ased t
heir a
naly
ses o
n r
ela
tionship
:
TC
OE
=
Rf +
1 x
RP
m +
2 x
RP
s +
3 x
RP
B-t
o-M
+ R
Pu
Th
at
is, R
Pu
is independent
of
1 x
RP
m. A
uth
ors
define r
esid
uals
of
regre
ssio
n e
quation a
s idio
syncra
tic r
isk.
For
exam
ple
:
Malk
iel and X
u,
“Idio
syncra
tic R
isk a
nd S
ecurity
Retu
rns,”
work
ing
paper
(May 2
004)
Spie
gel and W
ang,
“Cro
ss-s
ectional V
ariation in S
tock R
etu
rns:
Liq
uid
ity a
nd I
dio
syncra
tic R
isk,”
work
ing p
aper
(Sept
2005)
Fu,
“Idio
syncra
tic R
isk a
nd t
he C
ross-S
ection o
f E
xpecte
d R
etu
rns,”
work
ing p
aper
(May 2
008)
Bro
ckm
an,
Schutte,
and Y
u,
“Is I
dio
syncra
tic R
isk P
riced? T
he
Inte
rnational E
vid
ence,”
work
ing p
aper
(July
2009)
48
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American Bankruptcy Institute
99
VA
LC
ON
2010
Stu
die
s o
f M
ark
et
Pri
cin
g o
f C
om
pan
y
Sp
ecif
ic R
isk
Why d
oes t
he m
ark
et
price c
om
pany-s
pecific
(id
iosyncra
tic r
isk)?
Investo
rs a
re n
ot
fully
div
ers
ifie
d (
brief
com
ment)
•M
alk
iel and X
u,
“Idio
syncra
tic R
isk a
nd S
ecurity
Retu
rns,”
work
ing p
aper
(May 2
004)
•F
u,
“Idio
syncra
tic R
isk a
nd t
he C
ross-S
ection o
f E
xpecte
d R
etu
rns,”
work
ing p
aper
(May 2
008)
•B
rockm
an,
Schutte,
and Y
u,
“Is I
dio
syncra
tic R
isk
Priced? T
he I
nte
rnational E
vid
ence,”
work
ing
paper
(July
2009)
49
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100
Valcon2010
VA
LC
ON
2010
Stu
die
s o
f M
ark
et
Pri
cin
g o
f C
om
pan
y
Sp
ecif
ic R
isk (
co
nt’
d)
Why d
oes t
he m
ark
et
price c
om
pany-s
pecific
(id
iosyncra
tic r
isk)?
Info
rmation r
isk o
r firm
sp
ecific
un
ce
rta
inty
(n
ot
ma
ny a
na
lysts
, d
ispers
ion o
f analy
st
estim
ate
s,
poor
record
of
meeting a
naly
st
fore
casts
)
•R
ajg
opal and V
enkata
chala
m,
“Info
rmation R
isk a
nd
Idio
syncra
tic R
etu
rn V
ola
tilit
y o
ver
the L
ast
Four
Decades,”
work
ing p
aper
(January
2005)
•B
arinov,
“Turn
over:
Liq
uid
ity o
r U
ncert
ain
ty?”
work
ing p
aper
(M
arc
h 2
009)
•B
err
ada a
nd H
ugonnie
r, “
Incom
ple
te I
nfo
rmation,
Idio
syncra
tic
Vola
tilit
y a
nd S
tock R
etu
rns,”
work
ing p
aper
(January
2009)
•T
eoh a
nd Y
ang,
“R-S
quare
: N
ois
e o
r F
irm
-Specific
Info
rmation?”
(July
2008) 5
0
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American Bankruptcy Institute
101
VA
LC
ON
2010
Stu
die
s o
f M
ark
et
Pri
cin
g o
f C
om
pan
y
Sp
ecif
ic R
isk (
co
nt’
d)
Why d
oes t
he m
ark
et
price c
om
pany-s
pecific
(id
iosyncra
tic r
isk)?
Idio
syncra
tic r
isk a
nd s
ize e
ffect
are
inte
rrela
ted –
port
folio
s o
f c
om
panie
s w
ith h
igh idio
syncra
tic r
isk g
enera
lly a
re s
mall
com
panie
s
•F
u,
“Idio
syncra
tic R
isk a
nd t
he C
ross-S
ection o
f E
xpecte
d R
etu
rns,”
work
ing p
aper
(May 2
008)
•A
ngelid
is a
nd T
essaro
matis,
“Equity R
etu
rns a
nd I
dio
syncra
tic
Vola
tilit
y:
UK
Evid
ence,”
work
ing p
aper
(June 2
005)
51
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102
Valcon2010
VA
LC
ON
2010
Co
mp
an
y-S
pecif
ic R
isk A
dju
stm
en
t –
Ex
am
ple
of
Us
ing
Ju
dg
me
nt
SE
LE
CT
ED
SP
EC
IFIC
CO
MP
AN
Y R
ISK
S
Sp
ecif
ic R
isk
P
rem
ium
Ran
ge
Key
Man
, M
anag
emen
t 0%
- 5
%
Ab
solu
te S
ize
0%
- 5
%
Fin
anci
al S
tru
ctu
re
0%
- 5
%
Pro
du
ct/G
eog
rap
hic
al D
iver
sifi
cati
on
0%
- 5
%
Cu
sto
mer
Div
ersi
fica
tio
n
0%
- 5
%
Ear
nin
gs:
Mar
gin
s an
d H
isto
rica
l
Pre
dic
tab
ilit
y
0%
- 5
%
Oth
er S
pec
ific
Ris
ks
0%
- 5
%
Merc
er
“A
n A
dju
ste
d C
yclical A
sset/
Pri
cin
g M
od
el
(AC
AP
M),
” B
usin
ess V
alu
ati
on
Revie
w (
Dec.
1989).
52
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American Bankruptcy Institute
103
VA
LC
ON
2010
Es
tim
ati
ng
To
tal
Co
st
of
Eq
uit
y C
ap
ita
l a
nd
Co
mp
an
y-S
pecif
ic R
isk u
sin
g T
ota
l B
eta
Butler
and P
inkert
on:
“Com
pany-S
pecific
Ris
k-
A D
iffe
rent
Para
dig
m:
A N
ew
Benchm
ark
,” B
usin
ess V
alu
ation R
evie
w (
Sum
mer
2006).
“Quantify
ing C
om
pany-S
pecific
Ris
k:
A N
ew
, E
mpiric
al
Fra
mew
ork
with P
ractical A
pplic
ations,”
B
usin
ess
Valu
ation U
pdate
(F
ebru
ary
2007).
53
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104
Valcon2010
VA
LC
ON
2010
Deri
vati
on
of
To
tal
Beta
54
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American Bankruptcy Institute
105
VA
LC
ON
2010
To
tal
Beta
T m
easure
s t
he t
ota
l risk o
r vola
tilit
y o
f an indiv
idual s
tock (
s)
rela
tive t
o t
he t
ota
l risk o
r vola
tilit
y o
f th
e m
ark
et
(m).
s is
the c
orr
ect
tota
l risk m
easure
if
one o
wns a
sin
gle
sto
ck.
m is t
he c
orr
ect
tota
l risk m
easure
for
the S
&P
500 if
the
S&
P index is t
he o
nly
security
in o
ne’s
port
folio
.
T (
tota
l risk)
will
alw
ays b
e g
reate
r th
an
(syste
matic r
isk
only
).
All
observ
ations w
ill n
ever
fall
on t
he b
est-
fit
linear
regre
ssio
n lin
e (
is t
his
beta
estim
ation w
ith e
rror
or
com
pany-s
pecific
ris
k o
r both
?).
55
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106
Valcon2010
VA
LC
ON
2010
Th
e B
P M
od
el:
Qu
an
tifi
ca
tio
n o
f C
om
pa
ny
-Sp
ec
ific
Ris
k u
sin
g T
ota
l B
eta
Assum
ing t
hat
TC
OE
= R
f +
T x
RP
m
Equating it
to t
he m
odifie
d C
AP
M a
nd s
olv
ing f
or
the o
nly
unknow
n in t
he e
quations:
TC
OE
= R
f +
T x
RP
m =
Rf +
x
RP
m +
RP
s +
RP
u
Modifie
d C
AP
M
we g
et:
Co
mp
an
y-S
pecif
ic R
isk P
rem
ium
= (
T–
) x R
Pm
– R
Ps
56
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American Bankruptcy Institute
107
––
VA
LC
ON
2010
BP
Mo
del
Issu
es?
Is T
CO
E d
eri
ve
d f
rom
To
tal
Be
ta c
on
sis
ten
t w
ith
FM
V?
Can
on
e u
se T
CO
E e
sti
mate
d u
sin
g T
ota
l B
eta
to
deri
ve r
eliab
le e
sti
mate
s o
f C
om
pan
y-S
pecif
ic –
Ris
k P
rem
ium
s
57
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Valcon2010
VA
LC
ON
2010
Do
TC
OE
esti
mate
s d
eri
ved
fro
m T
ota
l
Beta
lead
to
esti
mate
d F
MV
?
BP
Model is
based o
n t
he p
rem
ise t
hat
most
ow
ners
of
private
busin
esses a
re u
ndiv
ers
ifie
d,
there
fore
the
cost
of
capital of
the p
rivate
busin
ess s
hould
inclu
de
that
extr
a a
mount
due t
o t
he o
wner
bein
g
undiv
ers
ifie
d.
This
leads t
o t
he u
nre
asonable
positio
n t
hat
there
are
at
least
two c
osts
of
capital fo
r a b
usin
ess-
the c
ost
of
capital fo
r in
vesto
rs t
hat
com
prise t
he p
ool of
likely
buyers
and t
he c
urr
ent
ow
ner.
58
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American Bankruptcy Institute
109
VA
LC
ON
2010
Do
TC
OE
esti
mate
s d
eri
ved
fro
m T
ota
l
Beta
lead
to
esti
mate
d F
MV
?
Busin
esses a
nd inte
rests
in b
usin
esses (
any a
sset)
sell
in v
arious
mark
ets
made u
p o
f pools
of
likely
buyers
. T
he p
ool of
likely
buyers
set
the m
ark
et
price.
Som
e m
ark
ets
are
com
prised o
f m
ore
div
ers
ifie
d investo
rs t
han
oth
ers
. B
ut
no m
ark
et-
oth
er
than p
ossib
ly t
he p
ool of
buyers
for
the
sm
alle
st
busin
esses-
are
fully
undiv
ers
ifie
d.
Ris
k o
f an investm
ent
and its
FM
V m
ust
be d
evelo
ped b
ased o
n t
he
risks (
and p
ricin
g)
perc
eiv
ed b
y investo
rs t
hat
com
prise t
he p
ool of
likely
buyers
for
the s
ubje
ct
asset
- not
based o
n t
he d
ivers
ific
ation
or
non-d
ivers
ific
ation o
f th
e c
urr
ent
ow
ner.
If o
ne is v
alu
ing t
he s
malle
st
busin
esses,
one s
hould
lik
ely
be u
sin
g
pricin
g f
rom
the I
BA
or
Pra
tt S
tat’s d
ata
bases,
not
from
public
com
para
ble
com
panie
s.
59
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110
Valcon2010
VA
LC
ON
2010
Do
TC
OE
esti
mate
s d
eri
ved
fro
m T
ota
l B
eta
matc
h t
he r
isk o
f th
e i
nvestm
en
t?
“The c
ost
of
capital is
a f
unction o
f th
e investm
ent, n
ot
the
investo
r.”
Roger
Ibbots
on,
Cost
of
Capital W
ork
shop
, 1999
(
Pra
tt a
nd G
rabow
ski, C
ost
of
Capital 3
rd e
d., p
age 5
)
Th
e c
os
t o
f c
ap
ita
l s
ho
uld
re
fle
ct
the
ris
k o
f th
e
in
ve
stm
en
t, n
ot
the
co
st
of
fun
ds
to
th
e i
nv
es
tor.
60
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American Bankruptcy Institute
111
VA
LC
ON
2010
Stu
die
s o
n p
ric
ing
of
Idio
sy
nc
rati
c R
isk
Researc
hers
do f
ind t
hat
public
sto
ck r
etu
rns r
eflect
com
pany-s
pecific
(id
iosyncra
tic r
isk)
as w
ell
as s
yste
matic
risks.
Em
piric
al stu
die
s o
f com
pany s
pecific
ris
k,
RP
u, b
ased t
heir
analy
ses o
n r
ela
tionship
:
TC
OE
=
Rf +
1 x
RP
m +
2 x
RP
s +
3 x
RP
B-t
o-M
+ R
Pu
Th
at
is, R
Pu
is independent
of
[1 x
RP
m]
Researc
hers
define r
esid
uals
of
regre
ssio
n e
quation a
s
idio
syncra
tic r
isk.
No o
ne u
ses:
TC
OE
= R
f +
T x
RP
m.
The idio
syncra
tic r
isk is independent
of
the s
yste
matic r
isk.
61
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112
Valcon2010
VA
LC
ON
2010
Is C
SR
P d
eri
ve
d f
rom
BP
Mo
de
l R
eli
ab
le?
Co
mp
an
y-S
pec
ific
Ris
k P
rem
ium
= (
T–
) x R
Pm
– R
Ps
Beta
estim
ate
s u
sin
g “
look-b
ack”
meth
ods a
re s
ubje
ct
to
estim
ation e
rror
Com
pany-S
pecific
Ris
k P
rem
ium
estim
ate
s d
erived f
rom
beta
estim
ate
s a
lso s
ubje
ct
to e
stim
ation e
rror
Ascribin
g b
eta
estim
ation e
rror
to C
SR
P m
akes C
SR
P
unre
liable
If levere
d (
observ
ed)
beta
s a
re u
sed,
then m
ixes o
pera
ting
risk a
nd f
inancia
l risk.
Is C
SR
P d
ue t
o f
inancia
l risk?
Opera
ting r
isk? H
ow
do y
ou s
epara
te? M
atc
hin
g t
o
guid
elin
e c
om
panie
s m
ust
then b
e o
n b
oth
opera
ting a
nd
financia
l risk c
hara
cte
ristics.
62
2010 Valcon Text Print.indd 1122010 Valcon Text Print.indd 112 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
113
VA
LC
ON
2010 C
alc
ula
tin
g T
ota
l B
eta
- E
xam
ple
63
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114
Valcon2010
VA
LC
ON
2010
Ca
lcu
lati
ng
CS
RP
us
ing
BP
Mo
de
l -
Ex
am
ple
Com
pany-S
pecific
Ris
k P
rem
ium
= (
T–
) x R
Pm
– R
Ps
Estim
ate
of
CS
RP
(usin
g R
Pm
or
ER
P e
stim
ate
of
5%
and s
ize
pre
miu
m o
f 4.7
6%
based o
n m
ark
et
valu
e o
f $505 m
illio
n f
rom
port
folio
21,
Exhib
it B
-1 o
f D
uff &
Phelp
s R
isk P
rem
ium
Report
) :
Usin
g O
LS
beta
estim
ate
, B
P m
odel im
plie
s C
SR
P:
Tota
l beta
= 1
.89 /
.374 =
5.0
5 if
1.8
9 is “
true”
beta
C
SR
P =
[5.0
5 –
1.8
9]
x 5
% -
4.7
6%
= 1
1.0
4%
Usin
g S
um
Beta
estim
ate
the B
P m
odel im
plie
s C
SR
P:
T
ota
l beta
= 3
.87 /
.374 =
10.3
5 if
3.8
7 is “
true”
beta
C
SR
P =
[10.3
5 –
3.8
7]
x 5
% -
4.7
6%
= 2
7.7
4%
[N
ote
: beta
is levere
d a
nd D
/E =
56%
]
64
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American Bankruptcy Institute
115
VA
LC
ON
2010
Ca
lcu
lati
ng
CS
RP
us
ing
BP
Mo
de
l –
Ex
am
ple
(c
on
t’d
)
Usin
g O
LS
beta
estim
ate
: T
ota
l B
eta
= 1
.89 /
.374 =
5.0
5 if
1.8
9 is “
true”
beta
B
ut
std
err
or
= .
62 m
eanin
g “
true”
beta
lie
s b
etw
een
1.8
9 +
- [2
x .
62]
or
betw
een .
65 t
o 3
.13 w
ith 9
5%
pro
babili
ty o
r “t
rue”
Assum
e t
he T
ota
l B
eta
= 5
.05 is “
true”
tota
l beta
but
beta
estim
ate
is
subje
ct
to e
stim
atio
n e
rror.
Com
pany-S
pecific
Ris
k P
rem
ium
= (
T–
) x R
Pm
– R
Ps
Estim
ate
of
CS
RP
(usin
g E
RP
estim
ate
of
5%
and s
ize p
rem
ium
of
4.7
6%
based o
n m
ark
et
valu
e o
f $505 m
illio
n f
rom
port
folio
21,
Exhib
it B
-1 o
f D
uff &
Phelp
s R
isk P
rem
ium
Report
) th
en C
SR
P c
ould
be
betw
een
{
[5.0
5 -
.65]
x 5
% -
4.7
6%
} =
17.2
4%
and
{
[5.0
5 -
3.1
3]
x 5
% -
4.7
6%
} =
4.8
4%
65
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116
Valcon2010
VA
LC
ON
2010
Co
nc
lus
ion
s o
n B
P M
od
el
Is T
CO
E d
eri
ve
d f
rom
To
tal
Be
ta c
on
sis
ten
t w
ith
FM
V?
NO
T L
IKE
LY
EX
CE
PT
FO
R S
MA
LL
ES
T
BU
SIN
ES
SE
S
Can
on
e u
se T
CO
E e
sti
mate
d u
sin
g T
ota
l B
eta
to
deri
ve r
eliab
le e
sti
mate
s o
f C
om
pan
y-S
pecif
ic –
Ris
k P
rem
ium
s
N
O -
MIX
ES
CO
MP
AN
Y-S
PE
CIF
IC R
ISK
WIT
H
LA
CK
OF
DIV
ER
SIF
ICA
TIO
N R
ISK
66
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American Bankruptcy Institute
117
VA
LC
ON
2010
Du
ff &
Ph
elp
s R
isk P
rem
ium
Rep
ort
–
Ris
k S
tud
y
Researc
h t
he r
ela
tionship
betw
een c
om
pany “
risk”
and r
etu
rn o
n e
quity r
isk p
rem
ium
s
Applic
ations t
o c
ost
of
capital estim
ation u
sin
g b
uild
-up m
eth
od
Measure
s h
isto
rical
realiz
ed r
isk p
rem
ium
s:
mark
et
ris
k p
rem
ium
plu
s c
om
pan
y-s
pecif
ic r
isk
Art
icle
s:
Septe
mber
1999 a
nd M
arc
h 2
000,
Busin
ess
Valu
ation R
evie
w
Form
erly S
tandard
& P
oor’s C
VC
Ris
k P
rem
ium
Stu
dy
67
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118
Valcon2010
VA
LC
ON
2010 Du
ff &
Ph
elp
s M
easu
res o
f “R
isk”
Pro
fita
bilit
y (
op
era
tin
g p
rofi
t m
arg
in)
Opera
ting p
rofit
/ re
venue
Vo
lati
lity
of
Ea
rnin
gs
Vola
tilit
y o
f opera
ting p
rofit
marg
in
Vola
tilit
y o
f R
OE
(N
I/book v
alu
e o
f equity)
68
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American Bankruptcy Institute
119
VA
LC
ON
2010
Measu
rin
g V
ola
tility
:
Co
eff
icie
nt
of
Vari
ati
on
Co
eff
icie
nt
of
Vari
ati
on
= S
tandard
Devia
tion /
Mean
Exam
ple
: C
oeffic
ient
of
Variation in O
pera
ting I
ncom
e M
arg
in
Avera
ge M
arg
in =
15%
Sta
ndard
Devia
tion o
f M
arg
in =
5%
CV
(O
p.Inc.
Marg
in)
= 5
/15 =
33%
69
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Valcon2010
VA
LC
ON
2010
Sa
mp
le C
alc
ula
tio
n:
Op
era
tin
g M
arg
in
an
d C
V (
Op
era
tin
g M
arg
in)
70
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American Bankruptcy Institute
121
VA
LC
ON
2010
Sam
ple
Calc
ula
tio
n:
CV
(R
OE
)
71
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Valcon2010
VA
LC
ON
2010
Ho
w D
o T
hese R
isk M
easu
res
Rela
te t
o R
ate
s o
f R
etu
rn?
Sort
com
panie
s into
25 p
ort
folio
s,
ranked b
y r
isk m
easure
s:
–O
pera
ting incom
e m
arg
in (
Exhib
it D
-1)
–C
V (
opera
ting incom
e m
arg
in)
(Exhib
it D
-2)
–C
V (
RO
E)
(Exhib
it D
-3)
Sam
e p
rocedure
as u
sed w
hen r
ankin
g b
y s
ize
Results:
Low
er
pro
fita
bili
ty g
ives h
igher
equity r
etu
rns
Hig
her
earn
ings v
ola
tilit
y g
ives h
igher
equity r
etu
rns
72
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American Bankruptcy Institute
123
VA
LC
ON
2010
Du
ff &
Ph
elp
s R
isk-B
ased
Po
rtfo
lio
Deta
ils
(Exh
ibit
s D
-1 t
hro
ug
h D
-3)
73
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Valcon2010
VA
LC
ON
2010
Rela
tio
nsh
ip B
etw
een
Siz
e a
nd
Ris
k
Sm
all
com
panie
s a
re b
elie
ved t
o h
ave h
igher
rate
s o
f re
turn
than larg
e c
om
panie
s b
ecause s
mall
com
panie
s a
re “
inhere
ntly”
more
ris
ky.
Is t
his
tru
e?
Yes,
as m
easure
d b
y t
he s
tock-m
ark
et
based indic
ato
rs o
f b
eta
and p
rice v
ola
tilit
y.
D&
P d
ata
als
o d
em
onstr
ate
s t
hat
as c
om
pany s
ize
decre
ases,
fundam
enta
l m
easure
s o
f accounting r
isk
incre
ase –
show
ing t
hat
sm
all
com
panie
s a
re inhere
ntly
more
ris
ky (
see,
for
exam
ple
, E
xhib
it C
-1).
74
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American Bankruptcy Institute
125
VA
LC
ON
2010
Du
ff &
Ph
elp
s R
isk P
rem
ium
Rep
ort
-
Ex
hib
it C
-1
75
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126
Valcon2010
VA
LC
ON
2010
Du
ff &
Ph
elp
s R
ep
ort
Su
mm
ary
Exh
ibit
: P
rem
ium
s O
ver
Ris
k-F
ree R
ate
76
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American Bankruptcy Institute
127
VA
LC
ON
2010
Usin
g t
he D
uff
& P
help
s –
Ris
k S
tud
y
in
Bu
ild
-Up
Me
tho
d -
Ex
am
ple
5
77
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Valcon2010
VA
LC
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2010
Wh
y I
s T
his
Data
Usefu
l?
Dis
count
rate
gauges t
he r
isk o
f th
e c
om
pany
achie
vin
g t
he p
roje
cte
d c
ash f
low
s.
MV
e (SBBI)
may b
e a
n im
perf
ect
measure
of
risk o
f a
com
pany’s
opera
tions.
Sm
all
com
panie
s m
ay b
e less r
isky w
hen m
easure
d a
gain
st
fundam
enta
l accounting m
easure
s o
f risk.
How
ris
ky is a
sm
all
com
pany t
hat
has a
near
econom
ic m
onopoly
as a
result o
f a g
eogra
phic
or
mark
et
nic
he?
78
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American Bankruptcy Institute
129
VA
LC
ON
2010 C
om
pari
ng
D&
P E
xh
ibit
s A
– S
ize
Stu
dy v
s.
Exh
ibit
s D
– R
isk S
tud
y
Com
bin
e e
xhib
its w
ith k
now
ledge a
bout
the s
ubje
ct
com
pany,
its industr
y,
and t
he g
enera
l econom
y.
Whole
sale
r has t
hin
opera
ting m
arg
ins c
om
pare
d t
o t
he a
vera
ge c
om
pany f
rom
a p
ort
folio
in E
xhib
it A
.
But
those m
arg
ins m
ight
have u
nusually
low
variation
due t
o a
str
ong p
ositio
n in a
sta
ble
mark
et
nic
he.
Can b
e u
sed t
o g
et
a b
etter
handle
on C
om
pany
-Specific
Ris
k P
rem
ium
. 79
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2010
Co
st
of
Deb
t im
pacte
d b
y C
om
pan
y
Siz
e t
oo
The c
ost
of
debt
may b
e a
ffecte
d if
com
pany is s
mall
and less d
ivers
ifie
d:
Incre
ased lik
elih
ood o
f defa
ult in b
usin
ess
dow
ntu
rn
Less lik
ely
that
optim
um
capital str
uctu
re c
an b
e a
chie
ved (
e.g
., c
annot
borr
ow
again
st
valu
e o
f e
nvironm
enta
lly im
paired r
eal esta
te)
– m
ore
equity investm
ent
required
Measure
cost
of
debt
without
share
hold
er
guara
nte
es t
o s
epara
te v
alu
e o
f busin
ess f
rom
valu
e o
f share
hold
ers
’ oth
er
assets
80
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American Bankruptcy Institute
131
VA
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2010
Valu
ing
Fir
ms i
n D
istr
ess
There
are
at
least
thre
e w
idely
used m
eth
ods in v
alu
ing
firm
s in d
istr
ess:
Valu
e t
he b
usin
ess e
nte
rprise (
BE
) w
ith a
changin
g c
apital str
uctu
re o
ver
tim
e;
The a
dju
ste
d p
resent
valu
e (
AP
V)
meth
od;
Valu
e e
quity a
s a
n o
ption o
n t
he B
E.
81
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VA
LC
ON
2010
Valu
ing
Fir
ms i
n D
istr
ess
Ch
an
gin
g C
ap
ital
Str
uctu
re:
During t
he t
ransitio
n p
eriod f
rom
curr
ent
dis
tressed o
pera
tions t
o n
orm
aliz
ed o
pera
tions (
a p
eriod t
hat
varies d
ependin
g o
n t
he level of
curr
ent
dis
tress a
nd
econom
ic industr
y c
onditio
ns),
you p
roje
ct
deta
iled c
ash f
low
s.
The c
ost
of
capital com
ponents
change o
ver
tim
e a
s d
oes t
he
weig
hte
d a
vera
ge o
f th
e o
vera
ll cost
of
capital.
The c
ost
of
debt
capital is
reduced a
s d
ebt
is p
aid
dow
n a
nd t
he
cre
dit r
ating im
pro
ves;
The c
ost
of
equity c
apital is
reduced a
s f
inancia
l dis
tress is
reduced.
AP
V:
The g
enera
l fo
rmula
tion is:
P
V =
Pre
sent
Valu
e o
f U
nle
vere
d F
irm
+
Pre
sent
Valu
e o
f T
ax S
hie
ld +
Oth
er
Adju
stm
ents
82
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American Bankruptcy Institute
133
VA
LC
ON
2010
Valu
ing
Fir
ms i
n D
istr
ess
Valu
e o
f eq
uit
y a
s a
call o
pti
on
on
BE
:
Inputs
needed:
If t
he s
ubje
ct
com
pany is p
ublic
, th
e e
quity v
ola
tilit
y c
an b
e e
stim
ate
d e
ither
from
the o
bserv
ed v
ola
tilit
y o
f th
e s
ubje
ct
com
pany s
tock o
ver
a look-b
ack p
eriod o
r im
plie
d v
ola
tilit
y f
rom
tra
ded o
ptions.
If t
he s
ubje
ct
com
pany is n
ot
public
, th
en t
he e
quity v
ola
tilit
y c
an
be e
stim
ate
d e
ither
from
the o
bserv
ed v
ola
tilit
ies o
f guid
elin
e p
ublic
(i.e., c
om
para
ble
) com
panie
s o
ver
a look-b
ack p
eriod o
r im
plie
d v
ola
tilit
ies f
rom
tra
ded o
ptions.
The o
ption m
eth
od indic
ate
s t
he f
air m
ark
et
valu
e o
f equity a
t t
ime 0
based o
n t
he a
sset
vo
lati
lity
of
the b
usin
ess e
nte
rprise.
83
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LC
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2010
Dis
co
un
t R
ate
fo
r D
istr
essed
Bu
sin
ess
The d
iscussio
n o
f th
e r
ela
tionship
betw
een t
he f
ace v
alu
e o
f debt
and m
ark
et
valu
e o
f debt
should
be s
tructu
red a
round t
he
follo
win
g d
iagra
m:
Valu
e o
f a L
evered
Fir
m
A
sse
ts
Capital
V
alu
e o
f
Va
lue
of
Unle
vere
d
D
eb
t
Assets
C
ap
ita
l
plu
s
plu
s
Valu
e o
f
Valu
e o
f
Tax S
hie
ld
Eq
uity
Ca
pita
l
84
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135
VA
LC
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2010
Mark
et
vs F
ace V
alu
e o
f D
eb
t
For
exam
ple
, during p
rospero
us t
imes b
efo
re r
ecessio
n w
e h
ave t
he
follo
win
g r
ela
tionship
(usin
g t
he d
iagra
m):
1
80 =
unle
vere
d v
alu
e o
f assets
100 =
debt
at
mark
et
+
+
2
0 =
tax s
hie
ld
1
00 =
equity a
t m
ark
et
2
00
2
00
Where
the m
ark
et
valu
e o
f debt
= b
ook v
alu
e o
f debt
(contr
act
inte
rest
rate
on d
ebt
= m
ark
et
inte
rest
rate
on d
ebt
+ lik
elih
ood o
f colle
cting inte
rest
and
princip
al w
hen d
ue is c
ert
ain
) and t
he t
ax s
hie
ld =
pre
sent
valu
e o
f ta
x
savin
gs d
ue t
o inte
rest
deductions c
alc
ula
ted a
t ,
the p
re-t
ax c
ost
of
debt
(about
20%
of
the v
alu
e o
f debt)
.
Assum
e t
hat
the d
ebt
capacity indic
ate
d t
he d
ebt
is r
ate
d B
aa a
nd t
he
inte
rest
rate
reflects
that
rating.
85
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2010
Mark
et
vs F
ace V
alu
e o
f D
eb
t
Assum
e t
hat
“dis
tress”
– r
ecessio
n -
occurs
and t
he m
ark
et
valu
e o
f debt
and e
quity d
eclin
e a
s f
ollo
ws:
140 =
unle
vere
d v
alu
e o
f assets
80 =
debt
at
mark
et
+
+
10 =
tax s
hie
ld
7
0 =
equity a
t m
ark
et
1
50
150
What
happened?
86
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American Bankruptcy Institute
137
VA
LC
ON
2010
Imp
act
of
Recessio
n
A r
ecessio
n is c
ausin
g t
he d
eclin
e in e
xpecte
d c
ash f
low
s.
The
valu
e o
f th
e b
usin
ess w
ith
ou
t c
on
sid
era
tio
n o
f d
eb
t declin
ed in
the h
ands o
f th
e c
urr
ent
ow
ner
(that
is t
he u
nderlyin
g b
asis
that
drives m
ark
et
valu
es o
f debt
and e
quity).
Cash f
low
s in t
he n
ear
term
are
expecte
d t
o d
eclin
e a
nd,
in f
act,
result in losses.
The t
ax s
hie
ld is r
educed b
ecause t
ax s
avin
gs d
ue
to inte
rest
expenses a
re n
ot
goin
g t
o b
e r
ealiz
ed w
hile
the c
om
pany
is losin
g m
oney (
net
of
the im
pact
of
tax loss c
arr
y-b
acks).
The e
quity d
eclin
ed b
ecause t
he u
nle
vere
d v
alu
e o
f th
e a
ssets
has
declin
ed [
the e
xpecte
d c
ash f
low
s h
ave d
eclin
ed,
the v
ariabili
ty o
f th
e c
ash f
low
s h
as incre
ased r
esultin
g in a
hig
her
dis
count
rate
and
a low
er
pre
sent
valu
e o
f th
e c
ash f
low
s w
ithout
regard
s t
o d
ebt] a
nd
the p
resent
valu
e o
f th
e t
ax s
hie
ld (
a b
enefit
to t
he e
quity)
has
declin
ed.
87
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138
Valcon2010
VA
LC
ON
2010
Dis
tressed
Co
mp
an
ies
Fin
an
cia
l D
istr
ess:
A c
om
pany w
hose e
quity a
nd d
ebt
valu
es r
eflect
the p
ote
ntial
or
pro
babili
ty o
f defa
ult o
r liq
uid
ation s
cenarios is c
onsid
ere
d t
o b
e o
pera
ting
under
Fin
ancia
l D
istr
ess.
Fin
ancia
l D
istr
ess is t
ypic
ally
a r
esult o
f a h
igh d
ebt
burd
en,
couple
d w
ith d
ifficultie
s is a
ccessin
g c
apital m
ark
ets
. I
nvestm
ent
decis
ions b
ecom
e d
isto
rted d
ue t
o d
ebt
overh
ang inclu
din
g d
istr
essed a
sset
fire
-sale
s.
The e
quity a
nd d
ebt
mark
et
valu
es s
hould
reflect
analy
st’s v
iew
s a
nd
weig
hting o
f goin
g c
oncern
and d
efa
ult s
cenarios.
Defa
ult s
cenarios c
ould
in
clu
de,
for
exam
ple
, th
e inabili
ty t
o p
ay c
urr
ent
inte
rest
expense o
blig
ations,
or
inabili
ty t
o r
efinance c
urr
ent
debt
oblig
ations r
esultin
g in t
he n
eed t
o s
ell
a
port
ion o
f opera
ting a
ssets
. R
ating d
ow
ngra
des,
non-investm
ent
gra
de d
ebt
or
hig
h m
ark
et
yie
lds o
n d
ebt
are
all
indic
ato
rs t
hat
the m
ark
et
is w
eig
hin
g t
he
pote
ntial im
pact
of
dis
tress s
cenarios.
Managem
ent
spends m
uch o
f its t
ime
talk
ing t
o c
reditors
and legal/financia
l advis
ors
about
reorg
aniz
ation a
nd
refinancin
g p
lans inste
ad o
f ru
nnin
g t
he b
usin
ess.
A c
om
pany d
oes n
ot
need t
o
be in o
r near
bankru
ptc
y t
o b
e c
onsid
ere
d u
nder
financia
l dis
tress.
Fin
ancia
l D
istr
ess c
an a
lso lead t
o O
pera
tional D
istr
ess.
88
2010 Valcon Text Print.indd 1382010 Valcon Text Print.indd 138 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
139
VA
LC
ON
2010
Dis
tressed
Co
mp
an
ies
Op
era
tio
nal
Dis
tress:
Opera
tional D
istr
ess w
ill t
ypic
ally
occur
in p
eriods o
f sig
nific
ant
econom
ic d
ow
ntu
rn.
Fin
ancia
l D
istr
ess c
an a
lso lead t
o O
pera
tional
Dis
tress.
Oth
er
non-
recurr
ing e
vents
may a
lso lead t
o O
pera
tional D
istr
ess,
such a
s t
he loss o
f a m
ajo
r la
wsuit,
or
a r
egula
tory
inju
nction,
for
exam
ple
.
While
this
is n
ot
an e
xhaustive lis
t, t
he f
ollo
win
g s
ituations m
ay b
e indic
ato
rs o
f O
pera
tional D
istr
ess:
The c
om
pany is u
nable
to p
ay its
supplie
rs o
n a
tim
ely
basis
, le
adin
g
pote
ntially
to s
upply
short
ages o
r dis
ruptions;
The r
efu
sal by c
ert
ain
supplie
rs t
o s
erv
ice t
he c
om
pany,
again
causin
g
supply
dis
ruptions;
Manufa
ctu
ring f
acili
ties o
pera
ting a
t a s
ignific
antly low
level of
capacity
utiliz
ation;
Hig
h e
mplo
yee t
urn
over,
leadin
g t
o o
pera
tional dis
ruptions;
Impaired a
bili
ty t
o d
o b
usin
ess d
ue t
o c
usto
mers
’ concern
s f
or
part
s,
serv
ice
and w
arr
anty
inte
rruptions o
r cancella
tions if
the f
irm
file
s f
or
bankru
ptc
y;
or
The loss o
f key c
usto
mers
due t
o c
oncern
s o
f supply
relia
bili
ty,
both
in
term
s o
f qualit
y a
nd d
eliv
ery
tim
es.
89
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140
Valcon2010
VA
LC
ON
2010
Mark
et
vs F
ace V
alu
e o
f D
eb
t
Bondhold
ers
are
assum
ing t
hat
there
is n
ow
ris
k in r
ealiz
ing inte
rest
paym
ents
when t
hey
are
due.
They m
ay s
till
expect
to u
ltim
ate
ly r
eceiv
e t
heir $
100 p
rincip
al re
paym
ent
som
etim
e b
ut
not
necessarily
when c
ontr
actu
ally
due.
In a
dditio
n t
here
will
be c
osts
if
bankru
ptc
y w
ere
to o
ccur
even if
they u
ltim
ate
ly b
elie
ve t
hey w
ill r
eceiv
e t
heir $
100
princip
al.
We c
an d
epic
t th
at
scenario in p
resent
valu
e t
erm
s a
s f
ollo
ws:
Mark
et
valu
e o
f debt
= $
80 =
<20>
+ 1
00
where
the <
20>
is t
he p
resent
valu
e o
f th
e p
ossib
le d
ela
y in r
eceiv
ing inte
rest
paym
ents
w
hen d
ue w
ere
bankru
ptc
y t
o o
ccur
plu
s t
he c
osts
of
possib
le b
ankru
ptc
y (
even t
hough
ultim
ate
ly $
100 p
rincip
al is
ultim
ate
ly e
xpecte
d t
o b
e p
aid
). T
he “
risk a
dju
ste
d d
iscount
rate
” equate
s t
he p
robabili
ty w
eig
hte
d o
utc
om
es w
ith t
he m
ark
et
valu
e o
f $80:
Outc
om
e #
1 I
nte
rest
continues t
o b
e p
aid
as c
ontr
acte
d a
nd p
rincip
al is
re
paid
when d
ue
Outc
om
e #
2 I
nte
rest
is d
ela
yed a
nd r
epaid
with p
rincip
al at
a d
ate
after
contr
actu
ally
due b
ecause o
f bankru
ptc
y.
Assum
ing t
hat
the d
ebt
now
is r
ate
d B
- or
low
er,
the inte
rest
rate
has incre
ased a
nd t
he
mark
et
valu
e o
f debt
has d
ecre
ased t
o a
n a
mount
belo
w f
ace.
90
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American Bankruptcy Institute
141
VA
LC
ON
2010
Dis
co
un
t R
ate
fo
r D
istr
essed
Bu
sin
ess
Now
assum
e t
hat
we a
re v
alu
ing t
he B
E w
ithout
regard
s t
o t
he e
xis
ting c
apital
str
uctu
re.
The p
rice is e
qual to
the u
nle
vere
d v
alu
e o
f th
e b
usin
ess p
lus t
he
tax s
hie
ld t
hat
the b
uyer
will
realiz
e f
rom
inte
rest
that
can b
e s
upport
ed b
y t
he
curr
ent
debt
capacity o
f th
e f
irm
. A
ssum
e t
hat
the c
urr
ent
debt
capacity is
equal to
only
o
f th
e o
rigin
al debt
capacity (
i.e., 2
8.5
% o
f th
e c
urr
ent
unle
vere
d v
alu
e o
f th
e a
ssets
), a
n a
mount
to o
bta
in a
debt
rating o
f B
aa.
That
means t
hat
appro
xim
ate
ly $
40 o
f th
e p
urc
hase w
ill b
e d
ebt
(“buyer’s d
ebt”
),
resultin
g in a
tax s
hie
ld o
f appro
xim
ate
ly $
6 (
about
15%
of
the v
alu
e o
f th
e
buyer’s d
ebt)
.
We n
ow
have t
he f
ollo
win
g v
alu
es b
ased o
n t
he b
uyer’s a
naly
sis
:
140 =
unle
vere
d v
alu
e o
f assets
40 =
buyer’s d
ebt
at
mark
et
+
+
6
= t
ax s
hie
ld
1
06 =
buyer’s e
quity a
t m
ark
et
146
1
46
91
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142
Valcon2010
VA
LC
ON
2010
Dis
co
un
t R
ate
fo
r D
istr
essed
Bu
sin
ess
How
does o
ne r
econcile
the v
alu
es?
The v
alu
e o
f th
e B
E =
$146 t
o t
he b
uyer,
the s
elle
r’s d
ebt
has a
face
valu
e o
f $100 a
nd a
mark
et
valu
e o
f $80.
If w
e a
re v
alu
ing t
he B
E
without
regard
s t
o t
he e
xis
ting o
wner’s c
apital str
uctu
re,
then t
he
implie
d e
quity v
alu
e t
o t
he c
urr
ent
equity o
wner
is:
$146 m
inus $
100 (
face v
alu
e o
f debt
to b
e r
epaid
in c
hange o
f contr
ol tr
ansaction)
= $
46.
If t
he a
ssum
ption is a
n im
plie
d v
alu
e a
ssum
ing c
ontinued p
art
of
the
firm
the r
esult w
ould
be:
$146 m
inus $
80 (
mark
et
valu
e o
f debt)
= $
66.
92
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American Bankruptcy Institute
143
VA
LC
ON
2010
Gen
era
l F
orm
ula
fo
r W
AC
C
WA
CC
t = k
eut –
{T
St /
[ M
dt-
1 +
Me
t-1 ]}
– {
(keut -
kT
S)
(PV
TS
t-1 /
[ M
dt-
1 +
Me
t-1 ]
}
where
:
keut
= c
ost
of
equity c
apital, u
n-levere
d (
assum
ing f
irm
fin
anced
with a
ll equity)
at
tim
e =
t
TS
t =
Tax s
hie
ld r
ealiz
ed a
t tim
e =
t
Md
t-1
= M
ark
et
valu
e o
f debt
capital at
tim
e =
t –
1
Me
t-1
= M
ark
et
valu
e o
f equity c
apital at
tim
e =
t –
1
kT
S =
Dis
count
rate
on t
ax s
hie
ld b
ased o
n t
he r
isk o
f re
aliz
ing
the t
ax s
hie
ld (
typic
ally
either
kd(p
t),
the p
re-t
ax c
ost
of
debt, o
r k
eu ,
the u
nle
vere
d c
ost
of
equity)
PV
TS
t-1=
Pre
sent
valu
e o
f th
e t
ax s
hie
ld a
s o
f tim
e =
t-1
93
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144
Valcon2010
VA
LC
ON
2010
Gen
era
l F
orm
ula
fo
r W
AC
C (
co
nt’
d)
If w
e a
ssum
e t
ha
t k
TS =
keut (
the v
ariabili
ty o
f one r
ealiz
ing t
he
tax s
hie
ld is a
ppro
xim
ate
ly e
qual to
the v
ariabili
ty o
f cash f
low
s
of
the b
usin
ess b
efo
re inte
rest
expense)
then t
he a
bove f
orm
ula
sim
plif
ies t
o:
WA
CC
t = k
eut –
{T
St /
[ M
dt-
1 +
Me
t-1 ]
}
94
2010 Valcon Text Print.indd 1442010 Valcon Text Print.indd 144 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
145
VA
LC
ON
2010
Dis
co
un
t R
ate
fo
r D
istr
essed
Bu
sin
ess
What
dis
count
rate
s t
o u
se?
If w
e a
re v
alu
ing t
he B
E t
ruly
as a
n “
exit p
rice”
without
regard
s t
o t
he
exis
ting o
wner
and e
xis
ting c
apital str
uctu
re a
nd t
he b
uyer
finances
the h
ypoth
etical purc
hase a
ssum
ing a
n a
ppro
priate
debt
level, t
he
genera
l fo
rm o
f th
e W
AC
C w
ill s
et
kT
S =
kd(p
t) (
the p
re-t
ax c
ost
of
debt)
and t
he m
ark
et
valu
e o
f debt
(i.e
., $
40)
and e
quity (
i.e., $
106)
will
reflect
the b
uyer’s d
ebt
and e
quity.
If w
e a
re v
alu
ing t
he e
quity in t
he h
ands o
f th
e e
xis
ting o
wners
and
as p
art
of
the e
xis
ting c
apital str
uctu
re t
he g
enera
l fo
rm o
f th
e
WA
CC
will
set
kT
S =
keu (
the c
ost
of
unle
vere
d e
quity)
and
the
mark
et
valu
e o
f debt
(i.e
., $
80)
and t
he e
quity (
i.e., $
70)
will
reflect
the e
xis
ting o
wner’s d
ebt
and e
quity.
95
2010 Valcon Text Print.indd 1452010 Valcon Text Print.indd 145 1/21/10 2:58 PM1/21/10 2:58 PM
146
Valcon2010
VA
LC
ON
2010
Du
ff &
Ph
elp
s’
Ris
k P
rem
ium
Rep
ort
Pro
vid
es d
ata
on r
ealiz
ed e
quity r
etu
rns in e
xcess o
f th
e r
etu
rns
pre
dic
ted b
y C
AP
M f
or
“Hig
h F
inancia
l R
isk”
com
panie
s.
This
pre
miu
m c
an b
e a
dded t
o t
he s
tandard
CA
PM
estim
ate
of
the
incre
ase in t
he c
ost
of
equity c
apital fo
r th
e m
ark
et’s e
stim
ate
of
the c
ost
of
dis
tress (
econom
ic a
nd f
inancia
l dis
tress).
Crite
ria f
or
assig
nm
ent
to t
he h
igh f
inancia
l risk p
ort
folio
are
:
(1
) co
mp
an
ies in
ba
nkru
ptc
y o
r liq
uid
atio
n;
(2
) com
panie
s w
ith t
he 5
-year
avera
ge n
et
incom
e o
r opera
ting
incom
e in t
he p
rior
5-y
ears
less t
han z
ero
;
(3)
com
panie
s w
ith n
egative b
ook v
alu
e o
f equity a
t any o
f th
e
prior
5 f
iscal year
ends;
or
(4)
com
panie
s w
ith b
ook v
alu
e o
f debt
to m
ark
et
valu
e o
f equity
gre
ate
r th
an 8
0%
.
96
2010 Valcon Text Print.indd 1462010 Valcon Text Print.indd 146 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
147
VA
LC
ON
2010
Du
ff &
Ph
elp
s’
Ris
k P
rem
ium
Rep
ort
Cate
gorizin
g r
isk o
f H
igh F
inancia
l R
isk p
ort
folio
com
panie
s b
y
Altm
an “
z”
score
:
T1 =
Work
ing C
apital /
Tota
l A
ssets
T2 =
Reta
ined E
arn
ings /
Tota
l A
ssets
T3=
Earn
ings B
efo
re I
nte
rest
and T
axes /
Tota
l A
ssets
T4 =
Mark
et
Valu
e o
f E
quity /
Tota
l B
ook V
alu
e o
f Lia
bili
ties
T5 =
Sale
s /
Tota
l A
ssets
Z =
1.2
x T
1 +
1.4
x T
2 +
3.3
x T
3 +
.6
x T
4 +
.999 x
T5
Cate
gorize c
om
panie
s a
nd r
etu
rns:
1.8
< z
< 2
.99 =
“gre
y z
one”
z
< 1
.8 =
Dis
tress Z
one
97
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148
Valcon2010
VA
LC
ON
2010 C
om
pan
ies R
an
ked
by Z
Sco
re E
qu
ity
Pre
miu
ms f
or
Use i
n t
he B
uild
-up
Meth
od
Sourc
e: C
alc
ula
tions b
y ©
Duff a
nd P
help
s,
LLC
© 2
00902 C
RS
P®
, C
ente
r fo
r R
esea
rch in S
ecurity
Prices.
Gra
duate
School of
Busin
ess,
The U
niv
ers
ity o
f C
hic
ago u
sed w
ith p
erm
issio
n.
All
rights
reserv
ed.
w
ww
.crs
p.c
hic
agogsb.e
du
98
2010 Valcon Text Print.indd 1482010 Valcon Text Print.indd 148 1/21/10 2:58 PM1/21/10 2:58 PM
American Bankruptcy Institute
149
VA
LC
ON
2010
Co
mp
an
ies R
an
ked
by Z
Sco
re E
qu
ity P
rem
ium
s
over
CA
PM
fo
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