CrFA Valuation & Damages Calculation Flashcards

Which standard of value is most commonly applied in U.S. shareholder dispute litigation?

Answer: Fair value

In shareholder disputes, courts typically apply 'fair value' as defined by state statutes, which often excludes minority and marketability discounts unlike fair market value.

In a lost profits damages analysis, the 'but-for' scenario refers to:

Answer: The hypothetical profits the plaintiff would have earned absent the defendant's wrongful act

The but-for scenario constructs what the plaintiff's financial performance would have been had the wrongful conduct never occurred.

When using the income approach to value a closely held business in a forensic context, the capitalization of earnings method is most appropriate when:

Answer: Earnings are expected to grow at a constant, sustainable rate

The capitalization method divides a normalized earnings stream by a capitalization rate, making it suitable when growth is stable and long-term earnings can be estimated from current levels.

A discount for lack of marketability (DLOM) reflects:

Answer: The reduction in value because a private company interest cannot be quickly sold

DLOM accounts for the illiquidity of a private business interest compared to a publicly traded security that can be sold immediately.

In calculating economic damages, the 'reasonable certainty' standard requires that:

Answer: The fact of damages and the amount both be proven to a reasonable degree of certainty

U.S. courts require that both the existence and the amount of damages meet the reasonable certainty standard, though the amount may be estimated with some flexibility.

Which valuation multiple is most useful when comparing companies with different capital structures in a forensic business valuation?

Answer: Enterprise value-to-EBITDA (EV/EBITDA)

EV/EBITDA eliminates the effects of leverage and non-cash charges, making it a capital-structure-neutral multiple suitable for comparing businesses with varying debt levels.