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February 1, 2006 Telephone Conference
Top Controversies in Determining Cost of Capital
Date/Time: February 1, 2006 at: 10:00am-11:40am PST/11:00-12:40MT/12:00-1:40CST/1:00-2:40EST
Moderator: Jim Hitchner
Speakers: Harold Martin and Katherine Morris
Are taxes important for cost of capital? Can you afford to ignore beta? Have you adopted the supply side equity risk premium? Did you know there are nine inputs to the WACC? Did you know that there are at least ten choices for the Ibbotson equity size premium?
These questions and more will be addressed in this comprehensive session that will take an in-depth look at all the inputs to cost of capital including WACC, Build Up, and Modified CAPM. It will present all the choices, or at least those currently known, for each of those inputs and put to rest the controversies in determining cost of capital.
You won’t want to miss this extremely important telephone conference that packs a day’s worth of information into 100 minutes.
More information on current and future telephone conferences is available at www.BVResources.com /Conferences
New Court Cases
- Colmen Capital Advisors, Inc. v. Polar Plastics, Inc., 2005 U.S. Dist. LEXIS 15178 (E.D. Pa. July 26, 2005). Judge Savage.
- Estate of Blount v. Commissioner, 428 F.3d 1338, 2005 U.S. App. LEXIS 23502 (11 th Cir. October 31, 2005). Judge Birch.
- Geaccone v. Geaccone, 2005 Tex. App. LEXIS 5857 (Tex. App. July 28, 2005). Judge Hanks.
- Lazarachic v. Lazarachic, 2005 Va. App. LEXIS 291 (July 26, 2005). Judge Haley.
NEW! Click here for your complimentary case abstract of the Estate of Blount vs. Commissioner.
These cases and more are available to subscribers to the BVLaw database at BVLibrary.com . Abstracts will be available in an upcoming issue of Business Valuation Update® at BVLibrary.com
New updates to the BIZCOMPS® database have been posted online. 253 new transactions of “ Main Street” businesses have been added to the BIZCOMPS® database, which now contains 8,316 transactions. The transactions in BIZCOMPS® have median revenues of $360,000 and a $135,000 median selling price. In addition to over 1,420 transactions in the restaurant industry, the database also contains 800 deals in business services and over 650 deals in the area of personal service.
In addition to the BIZCOMPS® update, w e have also added new transactions to the following database since the last E-Update:
- Pratt’s Stats™ (now has 7,993 count)
- Public Stats™ (now has 1,926 count)
- Valuation Advisors’ Lack of Marketability Discount Study™ (now has 3,026 count)
These databases and more are available at BVMarketdata.com
Q: Do you have any insight on business that develops property for low income housing purposes because of the tax credits? In this particular company, the investors own 99 percent of the real estate properties and the business owns 1 percent (owned by husband and two partners). However, the business acts as a developer and prepares the property within the IRS guidelines to qualify for tax credits. The owners take good
compensation and claim that there is very little value in the 1 percent real estate portion. This is a potential marital dissolution valuation. I’m somewhat afraid of this one because there is real estate in five different states and they hire managers in each state. The administration office is local. They do not want to value the real estate because of the cost to do so and want a business valuation without the real estate value included. What do you think? Anonymous
A: I assume that “the business” owned by husband and two other partners is an entity (corporation, limited liability company, partnership). For convenience, I will call the development company the “Company.”
The Company owns a one percent General Partner (GP) interest in the various syndicated real estate projects that it develops. The one percent GP interest is an asset of the Company. The one percent GP interest may also represent a contingent liability of the Company because a GP has personal liability for all of the obligations of the partnership (including debt and tort liabilities). The divorcing spouse of the husband cannot reach the GP interests owned by the Company. The only asset her husband owns is a percentage interest in a real estate development company.
Use the standard valuation methods to determine the value of husband’s interest in the development company with special emphasis on normalized discounted cash flow and especially the Gordon Growth Capitalization Model for Calculating the Terminal Value Using the Discounting Method (defined and illustrated in Business Valuation Body of Knowledge by Shannon Pratt, pages 120-122).
The Net Asset Value (NAV) method will probably produce the least reliable results. The alternative use of NAV should consider the value of assets and debt (adjusted to fair market value). This means that the one percent GP interest in each syndication should be separately valued. The one percent GP interest is probably non-transferable (contractual restrictions and state law restrictions) and is probably non-controlling with regard to liquidation rights (GP cannot unilaterally force a liquidation of a limited partnership that it has syndicated). Unless the non-compensation return on investment is stellar, it is unlikely that a non-transferable, illiquid, and liability-exposed GP interest has much value. The governing documents of almost all syndicated limited partnerships prohibit a partner’s withdrawal, prohibit individual ownership of partnership property, and require a vote of 70 percent in interest of the partners (or more) to liquidate the partnership, the value of underlying real estate is relatively immaterial to the valuation of a partnership interest. For guideline law, see in general, Charles W. Ward v. Commissioner, 87 T.C. 78 (1986) and Dunn v. Commissioner of Internal Revenue , 301 F.3d 339, 348 (5th Cir. 2002), reversing Estate of Dunn v. Commissioner, T. C. Memo 2000–12.
Larry Gibbs, JD, AVA, Gibbs Professional Corporation
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