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Cost of Capital Method Components: Beta & Systematic Risk
Introduction
Risk is an unavoidable part of life and is particularly embedded when determining the cost of capital. No investment or valuation is guaranteed, as any prudent advisor or planner will tell you, but quality analysts and investors try to quantify and forecast risk.
The core output of the valuation process’ cost of capital is essentially a “cost of risk,” or the total premium expected for investing in an asset or a stake in a company. Proxies for risk drive the cost of risk output – namely, the firm’s particular beta and the market-wide, systematic risk. We will start with the latter.
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Cost of Capital Method Components: Risk-Free Rate & Equity Risk Premium
Introduction
A reasonable cost of capital calculation hinges on accurately assigning a risk-free rate and equity risk premium to the model. While both are less prone to analyst-specific subjective criteria, there is still nuance to each. Both are moving targets, and analysts must weigh variables feeding the components closely to determine the most accurate estimate.
Luckily, broadly accepted data sources feed each determination. Still, diligent assessments weigh conventional wisdom, project or company specifics, and a bit of predictive power that external factor forecasts with historical precedent.
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Act on Your Business Value Before it is Too Late
Your business value is important. And that´s exactly why you need to act before it´s too late.
One of your most valuable assets is your business, and understanding its value is crucial for making informed decisions about its future—meaning your future. Impacted by the success of your business are your time and emotional investment, fulfillment, and, at the end of the day, the future wealth of you and your family. In this article, we’ll specifically mention four valuation purposes whereby understanding what your business’ value is today and what drives this value, will allow you to take action.
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Definition and Meaning of ASC 820: Understanding Fair Value Measurement
Business valuation is a critical component of any company’s strategic planning and decision-making process. One important aspect of valuation is the determination of fair value, which is essential for financial reporting purposes, mergers and acquisitions, and other transactions. (ASC 820)
To achieve a consistent and reliable approach to fair value measurement, the Financial Accounting Standards Board (FASB) created ASC 820, also known as the Fair Value Measurement standard. In this article, we will explore the definition and meaning of ASC 820, as well as the main valuation purposes for which it is used.
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Intangible Definition – Intangible Assets & Business Valuation
As businesses grow and expand, the value of their assets grows along with them. While physical assets such as equipment and property are easy to identify and value, it’s important not to overlook the value of intangible assets as well. In this blog post, we’ll discuss the intangible definition, the importance of valuing intangible assets, and the challenges associated with valuing them.
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Business Valuation: Discounts for Lack of Liquidity and Marketability are Often Confused Concepts
Business appraisals of privately held businesses often include hefty discounts under fair market value, which can go as high as 70% or more of the 100% equity value due to the lack of marketability and/or liquidity relative to other marketable and liquid assets such as stocks trading in the NYSE.
Liquidity and marketability are often used interchangeably by many business valuation appraisers; however, there is a significant difference often missed, leading to improper determination of the discount applicable to a business value. This can lead to higher risk of improper taxation, over payment for equity interest purchases, or higher risk of audit and investigation if under an employee stock option plan (ESOP).
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How Discounts can Lower the Taxable Value of Your Business for Estate Planning
Business appraisers as part of valuation standards and accepted practices will often use applicable discounts in valuing privately held businesses. The identified value for equity interests as part of the overall estate are what the IRS use to determine the proper taxation. Meaning all else equal, if discounts are correctly applied to the said equity interests, this lowers their value, and hence lowers the taxable amount for estate planning / gifting of equity interests. As a result, discounts, can have a significant impact on the future tax liabilities for owners and their families. In this Business Valuation article, we will explain which discounts can be applicable to your business and how these are determined.
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Business Valuation Methods – How to Value a Privately-Held Business
Business valuations are as much art as they are science as it’s open to several interpretations and estimations on potential future outcomes of a company. Business valuation for privately held businesses in particular is more challenging due to the limited information that can be used to determine the fair market value of a business compared to the data available for public companies.
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10 Things Your Business Valuation Report Must Include for Estate Planning
For every business owner involved in estate planning, it’s crucial to find an appropriate business valuation expert that will prepare a highly defensible business valuation report that is submitted to the IRS. Reports that follow state-of-the-art valuation process, completely justified, and supported with all relevant citations become highly defensible, whilst on the other hand those that are poorly done are much more exposed to audits, investigations, improper taxation, penalties, fees, and at worse, costly litigation.
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How Higher Interest Rates Have Impacted Your Business’ Value
Although interest rate hikes have been meant to counter historical highs of inflation, they are not free of consequences to the economy or businesses. Such consequences have been significant headlines in recent weeks e.g., the 2nd largest collapse of a bank since 2001, SVB, along with the collapse of other regional banks.
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Quick Ratio
This post will take a dive into the concept of the quick ratio and its interpretation, along with an example.
The quick ratio, commonly referred to as the acid-test ratio, measures the ability of a business to pay its short-term liabilities using only the current assets that are readily convertible into cash. These “quick” assets are mainly cash and cash equivalents, marketable securities, and accounts receivable.
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Current Assets
All those assets that a company or a business can easily convert into cash within a short period are known as current assets, and typically this occurs within a 12-month period. They can be utilized to fund business operations and to cover short-term liabilities. These assets continually fluctuate and are updated periodically on the balance sheet.
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EBITDA
This post will take a dive into the concept of EBITDA, an important metric in private business valuation and analysis.
The EBITDA stands for earnings before interest, taxes, depreciation, and amortization. This metric can be seen as a proxy for cashflows from a company’s operations and, therefore, used to analyze a company’s operating performance.
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Business Assets
A business asset is a resource owned by a business that is expected to generate or provide a benefit (generally in the form of money). An example is a machine (resource) that produces products that are then sold (which generates benefits). Business assets are recorded on the balance sheet and can be classified as current, non-current, fixed, financial, and intangible.
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Enterprise Value
This post will take a dive into the enterprise value concept—an important concept in private business valuations.
As its name suggests, enterprise value (EV) is the measure of a company’s total value. It includes all asset claims and ownership interests from both debt and equity holders, thus enabling an investor to compare companies with different capital structures. Therefore, the enterprise value can be thought of as the effective cost of buying a business (excluding takeover premiums).
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What is a Business Valuation, and How Much Does it Cost?
In order to understand What a Business Valuation Costs, we need to understand the fundamentals of a Business Valuation. What the service entails and what value does it provide, from there you can identify a cost for that valuable service.
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Why do I Need a Business Valuation?
If you’re a business owner, accountant, investor, or, simply taking an interest in business valuations, and have ever wondered Why do I Need a Business Valuation? Then this is the article for you, as we explain it from a couple of different angles.
A major mental block to the (necessary) process of accurate and recurring business valuation is the perception that it’s unnecessary except in limited circumstances. Most business owners understand the necessity of a business valuation when considering a sale. Still, just as many businesses require help understanding the benefit of maintaining a rhythmic assessment period in order to make an accurate business valuation available.
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