Financial Valuation -- Contents -- About the Editor -- About the Authors -- Acknowledgments -- Preface -- CHAPTER 1 Introduction to Financial Valuation -- Who Values Businesses? -- Purpose of a Valuation -- Professional Valuation Organizations -- Standards of Value -- Fair Market Value -- Investment Value -- Intrinsic Value -- Fair Value (State Rights) -- Fair Value (Financial Reporting) -- Premise of Value -- Principles of Appraisal Practice -- Dates -- Approaches to Value -- Valuation Procedures -- Summary -- Addendum 1-Valuation Checklist/Ready Reference (Revenue Ruling 59-60) -- Addendum 2-International Glossary of Business Valuation Terms -- CHAPTER 2 Standards of Value -- Introduction -- How Standard of Value Can Affect the Final "Number" -- Premises of Value -- Common Standards of Value -- Common Operational Premises Underlying the Standard of Value -- Application of Specific Standards of Value -- Fair Value in Shareholder Dissent and Oppression -- Control Premiums -- Immediately Before -- Unless Exclusion Would Be Inequitable -- Extraordinary Circumstances -- Current and Customary Techniques -- Standard of Value in Divorce -- Fair Value in Financial Accounting -- Measurement -- Conclusion -- CHAPTER 3 Research and Its Presentation -- Obtaining Internal Information -- A Directive from the Internal Revenue Service -- Research Techniques and Planning the Search -- Information Sources: Business Financial Databases -- Economic Research -- Selected Sources of Economic Information -- Industry Research -- Selected Sources of Industry Information -- Guideline Company and Transaction Research -- Sources for Publicly Traded Company Data -- Guideline Transaction Databases -- Presenting Research in a Report -- Other Sources of Information -- Summary -- Addendum 1-Valuation Information Request (VIR) General -- Addendum 2-Management Interview-Operations.

Addendum 3-Management Interview-Financial Review -- Addendum 4-Industry Research Form -- CHAPTER 4 Financial Statement and Company Risk Analysis -- Historical Financial Statement Analysis -- Length of Financial History to Be Used -- Spreading Financial Statements in Columnar Format -- Adjustments to Financial Statements -- Normalization of Historical Financial Statements -- Unusual, Nonrecurring, and Extraordinary Items -- Nonoperating Items -- Changes in Accounting Principle -- Nonconformance with GAAP -- Tax Affecting the Earnings of Subchapter S Corporations and Other Adjustments -- Degree of Ownership Interest -- Normalization Adjustments -- Common Sizing Normalized Financial Statements -- Ratio Analysis (Quantitative Analysis) -- Comparative Analysis -- Risk Analysis (Qualitative Analysis) -- Macroenvironmental Analysis -- Addendum 1-Commonly Used Financial Ratios: Application to Ale's Distributing -- CHAPTER 5 Income Approach -- Fundamental Theory -- Basics of Income Approach-"A Fraction" -- Income Approach Methodologies -- Normalization Process -- Adjustments for Ownership Characteristics -- Adjustments for GAAP Departures and Extraordinary, Nonrecurring, and/or Unusual Items -- Adjustments for Nonoperating Assets and Liabilities and Related Income and Expenses -- Adjustments for Taxes -- Adjustments for Synergies from Mergers and Acquisitions -- Determination of Future Benefits Stream (Cash Flows) -- Defining the Benefit Stream -- Defining Net Cash Flow -- Use of Historical Information -- The Capitalized Cash Flow Method -- The Discounted Cash Flow Method -- Terminal Value -- Capitalized Cash Flow Method (Revisited) -- Excess Cash Flow Method -- Conclusion -- Addendum I-Application of the Direct Equity Method (DEM) and the Invested Capital Method (ICM) -- Addendum 2-Dealing With Debt -- CHAPTER 6 Cost of Capital/Rates of Return.

Three Variables -- Characteristics of Cost of Capital -- Investor Expectations as Quantified by the Cost of Capital -- Cost of Capital Equals Discount Rate -- Cost-of-Capital Methods -- More on the Basic Concepts -- Discount Rate, Capitalization Rate, and Anticipated Growth -- Growth -- Relationship Between Risk and Cost of Capital -- Types of Risk-Another View -- Risks in a Small Business -- Methods for Developing Cost of Capital -- Size Premiums -- Methods to Articulate Unsystematic Risk -- Other Issues -- Capital Asset Pricing Model Method -- Development of the Weighted Average Cost of Capital -- Price/Earnings Method -- Adjustments to the Price/Earnings Ratio -- Arbitrage Pricing Theory -- Risk Rate Component Model FKA Build-Up Summation Model -- Cost-of-Capital Issues Related to Use of the Excess Cash Flow Method -- Addendum 1-Cost of Capital Controversies: It's Time to Look Behind the Curtain -- CHAPTER 7 Market Approach -- Overview -- Type of Value Obtained -- Advantages and Disadvantages of the Market Approach -- Choosing Guideline Companies -- Basic Implementation -- Sources and Characteristics of Guideline Company Data and DMDM Data -- Information Sources -- More Information on Transaction Databases -- Advantages and Disadvantages of the Guideline Company Transaction Method -- Publicly Traded Companies -- Information Sources for Industry "Comps" -- Stock Prices and Numbers of Shares Outstanding -- Advantages/Disadvantages of Public Company Data -- Characteristics of Publicly Traded Companies -- Financial and Other Indicators -- Sample Size Matters -- Comparable Companies' Information Dates -- Basic Financial Indicators -- Displaying the Information -- Adjustments to the Guideline and Subject Companies -- Income Adjustments -- Balance Sheet Adjustments -- Effects of Adjustments on Value -- Concluding Remarks on Choosing Comparables.

Calculating Standard Pricing Multiples -- Equity Versus Invested Capital -- Financial Statement Measures -- Computation of Multiples -- Matching Price to Parameter -- Dispersion of Pricing Multiples -- Applying the Valuation Multiples -- Concluding Thoughts on Value -- Using the Pricing Multiples for Growth -- Adjusting the Guideline Multiples for Size -- Summary -- CHAPTER 8 Asset Approach -- Fundamental Theory -- Applicability -- Premise of Value -- Control Versus Minority -- Built-in Gains -- General Steps in the Asset Approach -- Liabilities -- Unrecorded Assets and Liabilities -- Built-in Gain -- Conclusion -- Addendum 1A-Built-in Gains Taxes: Business Valuation Considerations, Part I -- Addendum 1B-Built-in Gains Taxes: Business Valuation Considerations, Part II -- Addendum 2-Understanding Real Estate Appraisals -- Addendum 3-Understanding Machinery and Equipment Appraisals -- Addendum 4-Revenue Procedure 77-12 -- CHAPTER 9 Valuation Discounts and Premiums -- Levels of Value -- Classifying Discounts -- Discounts for Lack of Control and Control Premiums -- Discounts for Lack of Marketability -- Empirical Evidence of Marketability Discounts -- Detailed Studies -- Quantitative Tools -- Other Discounts -- Analysis of Premiums Accorded Voting Versus Non-voting Stock -- Discounts and Premiums Summary -- CHAPTER 10 Report Writing -- USPAP Engagements -- Types of Valuation Engagements and Related Reports -- Complete Valuation Report -- Other Business Valuation Reports -- Sample Report -- Addendum-Sample Valuation Report, Valuation of the Common Stock of Acme Measurement Devices, Inc., as of May 31, 2008 -- CHAPTER 11 Business Valuation Standards -- History of Valuation Standards -- Government Action -- Organization of the USPAP Standards -- USPAP Business Valuation Standards (2010/2011) -- Other Business Valuation Standards and Credentials -- Summary.

Addendum 1-Standards: A Summary of the AICPA's New BV Standards -- Addendum 2-IRS BV Guidelines Checklist, Internal Revenue Service, Engineering Program, Business Valuation Guidelines 4.48.4 -- CHAPTER 12 Valuation of Pass-Through Entities -- Introduction -- Standard of Value -- Historical Backdrop -- Current Status of Debate -- Controlling Interests in Pass-Through Entities -- Controlling-Interest Studies -- Summary: Controlling Interests in Pass-Through Entities -- Tax Rates -- Noncontrolling Interests in Pass-Through Entities -- Treharne Model -- Van Vleet Model -- Mercer Model -- The Quantitative Marketability Discount Model -- Grabowski Model -- Summary: Non-Controlling Interest in Pass-Through Entity Theory -- Bibliography -- Addendum-A Summary Approach to PTE Valuation -- CHAPTER 13 Estate, Gift, and Income Tax Valuations -- Valuations in Estate and Gift Taxes -- Selected Internal Revenue Code Provisions -- Selected Treasury Regulations -- Selected Revenue Rulings -- Valuations for Income Taxes -- Addendum-Valuation Checklists/Ready Reference (Revenue Rulings 59-60, 77-287, and 93-12) -- CHAPTER 14 Valuation of Family Limited Partnerships -- Family Limited Partnership Uses -- Tax Advantages -- How Family Limited Partnerships Are Formed -- Other Characteristics of Family Limited Partnerships -- State Law, Property Rights, and Their Importance to the Valuation Process -- Improper Formation Can Create Problems for Partners -- Valuation of Family Limited Partnership Interests -- New Developments in Chapter 14 -- Tiered Discounts -- Illustrative Case Study -- CHAPTER 15 Summary of Tax Court Cases Issues -- Tax Cases -- CHAPTER 16 Shareholder Disputes -- History of Shareholder Disputes -- Causes of Action -- Standard of Value -- Valuation Date -- Future Appreciation or Depreciation -- Entire Fairness -- Valuation Methodology -- Valuation Adjustments.

Recent Court Case.