CrFA CrFA Valuation & Damages Calculation 1 — Questions and Answers
Question 1: Which standard of value is most commonly applied in U.S. shareholder dispute litigation?
- Fair market value
- Investment value
- Fair value (Correct answer)
- Intrinsic value
Correct 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.
Question 2: In a lost profits damages analysis, the 'but-for' scenario refers to:
- The company's profits after the harmful event occurred
- The hypothetical profits the plaintiff would have earned absent the defendant's wrongful act (Correct answer)
- Profits reported on the company's most recent tax return
- The industry average profitability used as a benchmark
Correct 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.
Question 3: When using the income approach to value a closely held business in a forensic context, the capitalization of earnings method is most appropriate when:
- The company has highly volatile, unpredictable earnings
- Earnings are expected to grow at a constant, sustainable rate (Correct answer)
- The company is in a start-up phase with no operating history
- The business holds primarily real estate assets
Correct 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.
Question 4: A discount for lack of marketability (DLOM) reflects:
- The risk that a minority shareholder will be outvoted
- The reduction in value because a private company interest cannot be quickly sold (Correct answer)
- Tax savings from accelerated depreciation deductions
- The difference between book value and fair market value
Correct 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.
Question 5: In calculating economic damages, the 'reasonable certainty' standard requires that:
- Damages be proven beyond a reasonable doubt as in criminal cases
- The fact of damages and the amount both be proven to a reasonable degree of certainty (Correct answer)
- Only the existence of damages, not their amount, need be proven with certainty
- Damages must be actuarially calculated by a licensed actuary
Correct 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.
Question 6: Which valuation multiple is most useful when comparing companies with different capital structures in a forensic business valuation?
- Price-to-earnings (P/E) ratio
- Price-to-book ratio
- Enterprise value-to-EBITDA (EV/EBITDA) (Correct answer)
- Dividend yield
Correct 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.
CrFA CrFA Valuation & Damages Calculation 1
Which standard of value is most commonly applied in U.S. shareholder dispute litigation?