content contributed by the appraisal database and...

Content Contributed by the Appraisal Database and Mentoring Services’ (ADAM)

Around the Valuation World™ in 90 Minutes Monthly Webzine

DISCLAIMER

All rights reserved. No part of this work covered by the copyrights herein may be reproduced or copied in any form or by any means—graphically, electronically, or mechanically, including photocopying, audio/video recording, or information storage and retrieval of any kind—without the express written permission of the CTI, NACVA, and the presenter.

The information contained in this presentation is only intended for general purposes.

It is designed to provide authoritative and accurate information about the subject covered. It is sold with the understanding that the copyright holder is not engaged in rendering legal, accounting, or other professional service or advice. If legal or other expert advice is required, the services of an appropriate professional person should be sought.

The material may not be applicable or suitable for the reader’s specific needs or circumstances. Readers/viewers may not use this information as a substitute for consultation with qualified professionals in the subject matter presented here.

Although information contained in this publication has been carefully compiled from sources believed to be reliable, the accuracy of the information is not guaranteed. It is neither intended nor should it be construed as either legal, accounting, and/or tax advice, nor as an opinion provided by the Consultants’ Training Institute (CTI), National Association of Certified Valuators and Analysts (NACVA), the Institute of Business Appraisers (IBA), the presenter, or the presenter’s firm.

The authors specifically disclaim any personal liability, loss, or risk incurred as a consequence of the use, either directly or indirectly, of any information or advice given in these materials. The instructor’s opinion may not reflect those of the CTI, NACVA, its policies, other instructors, or materials.

Each occurrence and the facts of each occurrence are different. Changes in facts and/or policy terms may result in conclusions different than those stated herein. It is not intended to reflect the opinions or positions of the authors and instructors in relation to any specific case, but rather to be illustrative for educational purposes. The user is cautioned that this course is not all inclusive.

© 2013—1997 NACVA • 5217 South State Street, Suite 400 • Salt Lake City, UT, 84107—ALL RIGHTS RESERVED.

The Consultants' Training Institute (CTI) is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be submitted through its web site: learningmarket.org.

© 2013 National Association of Certified Valuators and Analysts 2

How to ‘Rig’ a Valuation, Part Two: Long-TermGrowth Rates

Financial Valuation and Litigation Expert, April/May 2013, Issue 42

© 2013 National Association of Certified Valuators and Analysts

Roberto H. CastroJD, MST, MBA, CVA, CPVA

3

IN 90 MINUTES™

This article is a follow-up to an earlier article and presentation where the focus was on the discount rate.

The focus here is on the growth rate. Assume the engagement involves:◦ Small-to-medium sized company◦ Equity discount rate: 20%◦ This company is very promising, at least in the

short-run, the long-run, well … we really do not know


An interim growth rate? A long-term growth rate? Review of what rate(s) to use:


Income Approach Interim Growth? Long-term Growth?

DCF Yes Yes

Capitalization of Earnings

No! Yes

Nominal Growth Rate - defined as a rate that incorporates both real-output change and price change (inflation)

Real GDP – defined as output of the current GDP valued in the prices of a base year, sometimes referred to as “GDP corrected for inflation”

We typically use Nominal GDP rates


Ibbotson and Duff & Phelps (two sources) Look at Ibbotson (goes back to 1926)◦ Period: 1926-1960, stable (Range: 5.1% - 6.6%)◦ Period: 1926-2011, stable (Range 6.1% - 6.5%)

(Nominal GDP peaked at 6.5% for the period 1926 to 1985, the trend is downward).


Duff & Phelps (second source considered) Look at Ibbotson (goes back to 1963)◦ Period: 1963 – 2011, more variation in this source. 1963 - 2011: 6.9%, Nominal GDP

1963 - 1980: 9.3%, Nominal GDP

◦ The trend is downward, although the range is wider with this source: 5% to 8%.◦ So, is 8% reasonable?? Author says NO! 6% to

7% is arguably more reasonable.


Consider the Philadelphia Federal Reserve Board

Look for the Livingston Survey - published every six months. The median forecast appears here

Consider the following:◦ Ten-year forecasted nominal GDP average growth

rates from June 1991 to December 2012 is a low of 5.1% (December 2012) to a high of 6.7% (June 1991). The more recent periods suggest a range of 5 percent to 6 percent.


Putting the above all together:◦ “Any long-term rate above approximately 6.5

percent would be difficult to support and is an easy way to rig a valuation upward.”◦ “Some companies will only grow with inflation

without any real growth.”◦ “If a long-term growth rate is selected that is less

than anticipated inflation, this means that the company will deteriorate long term and loose cash.” (Declining industries …. But there are exceptions.)


Putting the above all together: Long-term does not always mean “in perpetuity”

Valuations involve discounting and the discount rate and long term growth rate dictate who quickly value is covered

A larger discount rate = lower PV (value is more front-loaded)

A larger discount rate and higher long-term growth rate means that the percentage of total value captured in the first ten years is lower


Discount Rate 15% 15% 25% 25%Long-term Growth Rate 3% 6% 3% 6%CapitalizedValue $833 $1,111 $455 $526

PV FactorYear 10 .247 .247 .107 .107PV Years 1 to 10/Percent Total Value

$557/67% $619/56% $389/86% $425/81%

PV Factor Year 15 .123 .123 .035 .035PV Years 1 to 15 81% 73% 95% 93%


Beware of short-term growth rates; these tend to be associated with new technology, and the edge enjoyed is usually short. It eventually converges to the average.

Short and long-term growth rates can be manipulated. Consider the historical sources and the Livingston Survey data.

If you go … higher than normal (for perpetuity/the terminal year be prepared to defend the value and recognize the effect on the % of the total value recaptured in the first ten years. Likewise, if the growth rate is low, be prepared to defend basis.


content contributed by the appraisal database and...

Documents