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The COVID-19 pandemic is causing betas and other measures of risk commonly used in company valuations to appear to have changed. Beta is a critical component used by valuation experts when determining the discount rate in business valuation. Even small changes in betas can cause large changes in the discount rate and, consequently, can cause large changes in valuation. In this panel discussion, Dr. Roper and Cliff Ang, CFA, will describe how the COVID-19 pandemic is impacting the data valuation experts rely on to assess risk when performing business valuations and whether practitioners should incorporate this change in their business valuations. Audience participants will learn about new research and available data that they may need to consider when determining whether the COVID-19 pandemic is impacting company valuations because of changes in risk.
Program Agenda
Our presentation is designed to meet three objectives:
Raise awareness of the impact that COVID-19 is having on data that is commonly used to assess risk when performing valuations.
Build knowledge base of participants to enable them to better address this impact when providing valuation opinions in the current environment.
Foster an environment of candid discussion of why valuation professionals may need to do more than just “business as usual” in the current context.
We will examine in detail the impact that COVID-19 Pandemic is having on three commonly used measures of risk in company valuation: volatility, market risk premium, and Beta.
First, we will demonstrate to participants the impact that COVID-19 is having on the data used to assess volatility. We discuss the behavior of volatility over both the Financial Crisis and the COVID-19 Pandemic and comment on the relation between the Federal Reserve’s response to both crises and market volatility. Volatility is commonly used in 409-A and ASC-820 valuations of private venture backed companies using option-based valuation methods.
Second, we extend this discussion of volatility by considering the behavior of the market risk premium and Beta. We explore the behavior of the market risk premium over both the Financial Crisis and the COVID-19 Pandemic. We will also discuss how company Betas appear to be changing and describe factors that participants may need to consider when making decisions about whether to incorporate this changed Beta into their valuation. The market risk premium and Beta are the most commonly used measures of risk in company valuation.
Along the way, we will introduce participants to empirical research related to the COVID-19 Pandemic impact on valuation and other important resources. Our presentation also identifies key COVID-19 Pandemic dates that may need to be considered when performing valuations in the current environment.
Learning Objectives
Describe how today’s COVID-19 market volatility can impact the reliability of their business valuation
List how COVID-19 impacts commonly used methods to estimate Beta
Describe how changes in Beta caused by COVID-19 impact business valuations
Demonstrate how commonly used methods can be used to examine whether they should incorporate a change in Beta caused by COVID-10 into their business valuation
Describe how to support the reliability of their analysis of Beta and business valuation during the pandemic
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