BV203 Exam Flashcards
How to get to FMV of Equity
FMV Assets less FMV of Liabilities
Reproduction Cost New
the expense to reproduce an EXACT DUPLICATE
Replacement Cost New
cost of replacing an existing property with one of equal utility
Depreciated Replacement Cost New
Replacement Cost New less ALL depreciation
Three Types of Depreciation
1) physical depreciation
2) functional obsolescence
3) economic obsolescence
Physical depreciation
loss of value caused by deterioration from age, wear and tear from use, fatigue and stress, exposure to the elements, and lack of maintenance
Functional Obsolescence
loss in value caused by lack of utility, excess capacity, changes in design/technology, and efficiency
Economic Obsolescence
loss in value caused by external factors
FMV in Continued Use
Usually depreciated replacement cost new plus delivery, installation and other make-ready costs (e.g. training costs)
Net Asset Value Method is better for companies that hold significant tangible assets? or intangibles assets?
better for companies with significant tangible assets
Net Asset Value Method is better for companies that hold no significant tangible assets? or no significant intangibles assets?
better for companies that hold no significant intangibles assets
Three types of liquidations
1) orderly liquidations
2) Forced liquidations
3) Liquidation value in Place
orderly liquidations
gross amount, expressed in terms of money that typically could be realized from a liquidation sales, given reasonable period of time to find a purchaser(s), with the seller being compelled to sell on an as-is, where-is basis, as of a specific date
Forced liquidations
gross amount, expressed in terms of money that typically could be realized from a properly advertised and conducted public auction with the seller being compelled to sell with a sense of immediacy on an as-is, where-is basis, as of a specific date
Liquidation value in Place
gross amount, expressed in terms of money that typically could be realized from a properly advertised transaction, with the seller being compelled to sell, as of a specific date, for a failed, non-operating facility, assuming that the entire facility is sold intact
WARA / WACC / Value Creation
if the WARA exceeds the WACC, value is created
WARA / WACC / Value-maximizing Mgmt.
A value-maximizing owner/mgmt. team will obtain and deploy capital in such a way that the WARA equals or exceeds the WACC
Asset Approach: control or minority value?
The asset approach will always result in a control value, unless adjustments are made to reflect a lack of control in the interest in the net asset
Built-in Capital Gains: Stock vs Asset deals
Buyers often pay less for stock in corporations than assets because of the trapped in capital gain and not being able to get a stepped up basis
Davis v Commissioner of the IRS (1998)
The Court concluded that the discount attributable to the built-in capital gains tax liability should be less than a dollar-for-dollar discount and, specifically, that 15% should be added to the DLOM to reflect the discount for built-in capital gains tax liability
Eisenberg vs Commissioner of IRS (1998)
Court was convinced that even though no liquidation of the corporation or sale of its assets was planned or contemplated on the val. date, a hypothetical willing seller and a hypothetical willing buyer would not have agreed on that date on a price for each of the blocks of stock in question that took no account of the corporation’s built-in capital gains
Jones vs Commissioner of IRS (2001)
The Court ruled than an additional DLOM due to built-in capital gains was not justified because there was a readily available means by which the tax on built-in gains could be avoid, a Section 754 election
Dunn vs Commissioner of IRS (2002)
The rationale is that under the asset approach, the subject assets are assumed to be sold. The Court concluded that the likelihood of liquidation is not a factor affecting built-in tax liability
Jelke vs Commissioner of IRS (2007)
The Court sided with a dollar-for-dollar discount to the net assets because such an approach forwent the need for prophesying and conjecture related to the sale of the underlying assets or liquidation of the corporation.
