New and events of the Philadelphia Bar Asso.
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the philadelphia lawyer Fall 2015 13 bases to determine if there were a number of chemical manufacturers sold within the last 10 years. If there were several companies sold, then the valuation expert will compare certain aspects of the companies sold such as the gross sales, gross profit margins, operating profit margins, earnings before interest, taxes, depreciation and amortization (EBITDA) and total assets to see if they can find common ratios related to the subject company. If the companies were of a similar size and were generally sold at a value approximating four to six times EBITDA, then the expert may draw a conclusion that the subject company's value may also be between four and six times EBITDA. The income capitalization approach is used to determine value by calculating a price that a purchaser would pay for the business to achieve a required stream of income return on their investment, to adequately compensate the purchaser for the risk taken, the lack of liquidity of their investment and the management of their investment. This approach is most often used when the primary motivation of the buyer is to obtain the future income stream from the existing business. ith regard to the income capitalization approach, calculations using rates such as a capitalization rate or a discount rate are performed to r different rates ar e determined and the reason these calculations are an accurate reflection of value. The capitalization rate is calculated based upon the various risks inherent in the purchase of a small company's stock. The capitalization rate is designed to measure the appropriate return that the hypothetical buyer would require to purchase this company, based upon the risks involved, as compared to the alternative investments available in the marketplace. To calculate the appropriate risks involved, the return on the investment is compiled based upon the sum of the risks present within the investment. The build-up begins with the risk-free rate of return, and adds additional premiums based upon equity risk, size risk and other specific company risks that may require an additional premium to achieve the hypothetical investor's required rate of return. The risk-free rate of return is a forward looking rate of return that factors in long-term expectations on growth and inflation. It is the rate of return that an investor would expect to achieve without taking any risk of decline in the value of their investment. Because the U.S. government can create money to fulfill its debt obligations under any scenario, the U.S. Treasury securities are often viewed as the risk-free rate. When valuing a business as a going concern, the appropriate time horizon for the selection of the risk-free rate is long- term. The expected equity risk premium can be defined as the additional return an The adjusted net worth approach usually compares the tangible asset values to the liabilities of the business to determine the net worth of the business.