CrFA CrFA Valuation & Damages Calculation 2 — Questions and Answers
Question 1: In a commercial damages case, the mitigation doctrine requires that the plaintiff:
- Accept any settlement offer from the defendant
- Take reasonable steps to reduce losses caused by the defendant's wrongful act (Correct answer)
- File suit within the statute of limitations period
- Provide financial statements audited under GAAS
Correct answer: Take reasonable steps to reduce losses caused by the defendant's wrongful act
Plaintiffs have a legal duty to make reasonable efforts to minimize their damages; failure to mitigate can reduce the recoverable amount.
Question 2: When normalizing earnings in a business valuation, a forensic accountant would most likely adjust for:
- GAAP-required depreciation on equipment
- Above-market compensation paid to owner-employees (Correct answer)
- Amortization of purchased goodwill
- Revenue recognized under the percentage-of-completion method
Correct answer: Above-market compensation paid to owner-employees
Owner-officer compensation that exceeds what an arm's-length replacement would require is added back and replaced with market-rate compensation to reflect true economic earnings.
Question 3: In a personal injury lost earnings case, a forensic accountant must discount future lost wages to present value using:
- The plaintiff's historical return on personal investments
- A risk-free rate reflecting the time value of money (Correct answer)
- The defendant's weighted average cost of capital
- The S&P 500 historical average annual return
Correct answer: A risk-free rate reflecting the time value of money
Future lost earnings are discounted using a risk-free rate because the wages would have been earned with certainty absent the injury, not at a speculative return.
Question 4: Which method is typically used to select guideline public companies in the market approach to business valuation?
- Regression analysis of industry financial ratios
- Identifying companies with similar SIC/NAICS codes, size, and business characteristics (Correct answer)
- Using the S&P 500 as a proxy for all industries
- Selecting only companies audited by a Big Four firm
Correct answer: Identifying companies with similar SIC/NAICS codes, size, and business characteristics
Guideline companies are selected based on operational and financial comparability, including industry classification, revenue size, and business model similarity.
Question 5: A royalty rate in an intellectual property damages analysis is most often determined using:
- The Georgia-Pacific factors (Correct answer)
- The Delaware block method
- The Ibbotson equity risk premium
- The CAPM beta coefficient
Correct answer: The Georgia-Pacific factors
The Georgia-Pacific factors provide a 15-factor framework courts use to determine a hypothetically negotiated reasonable royalty in patent infringement cases.
Question 6: When forensic accountants calculate damages in a breach of contract case, they typically measure:
- Punitive damages equal to three times actual losses
- Expectation damages that place the plaintiff in the position they would have occupied had the contract been performed (Correct answer)
- Restitution of profits earned by the defendant
- Statutory damages set by the relevant contractual governing law
Correct answer: Expectation damages that place the plaintiff in the position they would have occupied had the contract been performed
Expectation damages aim to give the non-breaching party the economic benefit of their bargain by recreating the financial position they would have achieved.
CrFA CrFA Valuation & Damages Calculation 2
In a commercial damages case, the mitigation doctrine requires that the plaintiff: