STN eee sees
in the asset approach whereby all
Adjusted Book Value Method—a method withi ‘and contingent) are
assets and liabilities (including off-balance sheet, Ren Aes cae
adjusted to their fair market values (NOTE: In Canada
he cost of equity
Arbitrage Pricing Theory—a multivariate model for estimating the quity
capital, which incorporates several systematic risk factors:
determining a value indication
Asset (Asset-Based) Approach—a general way Of
Of a business, business ownership interest, or security using one or more methods
based on the value of the assets net of liabilities,
Beta—a measure of systematic risk of a stock; the tendency of a stock's price to
Correlate with changes in a specific index
Blockage Discount—an amount or percentage deducted from the current market
Price of a publicly traded stock to reflect the decrease in the per share value ofa
block of stock that is of a size that could not be sold in a reasonable period of time
given normal trading volume.
Business Enterprise—a commercial, industrial, service, or investment entity (or a
combination thereof) pursuing an economic activity.
Business Risk—the degree of uncertainty of realizing expected future retums of
the business resulting from factors other than financial leverage. See Financial Risk
Business Valuation—the act or process of determining the value of a business
enterprise or ownership interest therein.
Capital Asset Pricing Model (CAPM)—a model in which the cost of capital for any
stock or portfolio of stocks equals a risk-free rate plus a risk premium that is
proportionate to the systematic risk of the stock or portfolio.
Capitalization—a conversion of a single period of economic benefits into value.
Capitalization Factor—any multiple or divisor used to convert anticipated
economic benefits of a single period into value.
Capitalization of Earnings Method—a method within the income approach
whereby economic benefits for a representative single period are converted to value
through division by a capitalization rate.
Capitalization Rate—any divisor (usually expressed as a percentage) used to
convert anticipated economic benefits of a single period into value.
Capital Structure—the composition of the invested capital of a business enterprise,
the mix of debt and equity financing
Cash Flow—cash that is generated over a period of time by an asset, group of
assets, or business enterprise. It may be used in a general sense to encompass
various levels of specifically defined cash flows. When the term is used, it should be
supplemented by a qualifier (for example, "discretionary" or "operating") and a
specific definition in the given valuation context
aIES
Tear
ich each line is expressed
item is shown as @
Common Size Statements—financial statements in Whi
fh item is expressed aS
as a percentage of the total. On the balance sheet, each inet
Percentage of total assets, and on the income statement, ea!
a percentage of sales
SS
Control—the power to direct the management and policies of a busines
enterprise.
fa
Control Premium—an amount or a percentage by which the pro rata value
controlling interest exceeds the pro rata value of a non-controlling interes
business enterprise, to reflect the power of control
Cost Approach—a general way of determining a value indication of an individual
asset by quantifying the amount of money required to replace the future service
capability of that asset.
Cost of Capital—the expected rate of return that the market requires in order to
attract funds to a particular investment.
Debt-Free—we discourage the use of this term,
Discount for Lack of Control—an amount or percentage deducted from the pro
rata share of value of 100% of an equity interest in a business to reflect the absence
of Some or all of the powers of control.
Discount for Lack of Marketability—an amount or percentage deducted from the
value of an ownership interest to reflect the relative absence of marketability.
Discount for Lack of Voting Rights—an amount or percentage deducted from the
per share value of a minority interest voting share to reflect the absence of voting
rights,
Discount Rate—a rate of return used to convert a future monetary sum into present
value.
Discounted Cash Flow Method—a method within the income approach whereby
the present value of future expected net cash flows is calculated using a discount
rate.
Discounted Future Earnings Method—a method within the income approach
whereby the present value of future expected economic benefits is calculated using
a discount rate.
Economic Benefits—inflows such as revenues, net income, net cash flows, etc.
Economic Life—the period of time over which property may generate economic
benefits,
Equity—the owner's interest in property after deduction of all liabilities.
ee |Te kets METHODOLOGIES
h flows available to pay out to equity holders (in
the business enterprise, making
Cash Flows—those cas!
decreasing debt financing.
ser funding operations of
increasing oF
Ided to a risk-free rate to reflect the
k free instruments (a component of the
Equity Net
the form of dividends) at
necessary capital investments, @
Equity Risk Premium—a rate of return ad
additional risk of equity instruments over ris!
cost of equity capital or equity discount rate).
Excess Eamnings—that amount of anticipated economic benefits inat exceeds an
e rate of retun on the value of a selected asset base (often net tangible
those anticipated economic benefits.
opr
ets) used to generate
fetermining a value indication of a
ity determined as the sum of a) the
rnings and b) the value of the
tangible assets. See Excess
Excess Earnings Method—a specific way of d
business, business ownership interest, or securit
value of the assets derived by capitalizing excess eal
selected asset base. Also frequently used to value int
Eamin,
Fair Market Value—the price, expressed in terms of cash equivalents, at which
property would change hands between a hypothetical willing and able buyer and a
hypothetical willing and able seller, acting at arms length in an open and
unrestricted market, when neither is under compulsion to buy or sell and when both
have reasonable knowledge of the relevant facts. (NOTE: In Canada, the term
“price” should be replaced with the term "highest price”}
Fairness Opinion—an opinion as to whether or not the consideration in a
transaction is fair from a financial point of view.
Financial Risk—the degree of uncertainty of realizing expected future returns of
the business resulting from financial leverage. See Business Risk
Forced Liquidation Value—liquidation value, at which the asset or assets are sold
as quickly as possible, such as at an auction.
Going Concern—en ongoing operating business enterprise
Going Concern Value—the value of a business enterprise that is expected to
continue to operate into the future. The intangible elements of Going Concern Value
result from factors such as having a trained work force, an operational plant, and
the necessary licenses, systems, and procedures in place.
Goodwill—that intangible asset arising as a result of name, reputation, customer
loyalty, location, products, and similar factors not separately identified
Goodwill Value—the value attributable to goodwill.
Guideline Public Company Method—a method within the market approach
whereby market multiples are derived from market prices of stocks of companies
that are engaged in the same or similar lines of business, and that are actively
traded on a free and open market
Income (Income-Based) Approach—a general way of determining a value
[scone ame ts earIntangible Its,
Intangible Assets—pon.ph hhises, trademarks, patents,
\ysical assets such as franc!
Copyrights, goodwill, equities, mineral rights, securities and contracts (aS vee
Grstinguished from physical assets) that grant rights and privilages, and hi
for the owner
Internal Rate of Return—a discount rate at which the present value of the future
cash flows of the investment equals the cost of the investment
Intrinsic Value—the value that an investor considers, on the basis of an evaluation
or avallable facts, to be the “true” or "real" value that will become the market value
when other investors reach the same conclusion. When the term applies to options,
itis the difference between the exercise price or strike price of an option and the
market value of the underlying security.
Invested Capital—the sum of equity and debt in a business enterprise. Debt is
typically a) all interest-bearing debt or b) long-term interest-bearing debt. When the
term Is used, it should be supplemented by a specific definition in the given
valuation context.
Invested Capital Net Cash Flows—those cash flows available to pay out to equity
holders (in the form of dividends) and debt investors (in the form of principal and
interest) after funding operations of the business enterprise and making necessary
capital investments.
Investment Risk—the degree of uncertainty as to the realization of expected
returns.
Investment Value—the value to a particular investor based on individual
investment requirements and expectations. (NOTE: in Canada, the term used is
"Value to the Owner”)
Key Person Discount — an amount or percentage deducted from the value of an
ownership interest to reflect the reduction in value resulting from the actual or
potential loss of a key person in a business enterprise.
Levered Beta—the beta reflecting a capital structure that includes debt
Limited Appraisal—the act or process of determining the value of a business,
business ownership interest, security, or intangible asset with limitations in
analyses, procedures, or scope.
Liquidity—the ability to quickly convert property to cash or pay a liability
Liquidation Value—the net amount that would be realized if the business is
terminated and the assets are sold piecemeal. Liquidation can be either "orderly" or
“forced.”1
STI hae eels METHODOLOGIES
Majority Control—the degree of control provided by a majority position.
Majority Interest—an ownership interest greater than 50% of the voting interest in
a business enterprise
jach—a general way of determining a value
's ownership interest, security, or intangible asset
the subject to similar businesses,
tangible assets that have been sold
Market (Market-Based) Appro!
indication of a business, busines:
by using one or more methods that compare
business ownership interests, securities, or int
Market Capitalization of Equity—the share price of a publicly traded stock
multiplied by the number of shares outstanding
Market Capitalization of Invested Capital—the market capitalization of equity plus
the market value of the debt component of invested capital.
Market Multiple—the market value of a company's stock or invested capital divided
by a company measure (such as economic benefits, number of customers).
Marketability—the ability to quickly convert property to cash at minimal cost.
Merger and Acquisition Method—a method within the market approach whereby
pricing multiples are derived from transactions of significant interests in companies
engaged in the same or similar lines of business.
Mid-Year Discounting—a convention used in the Discounted Future Earnings
Methos that reflects economic benefits being generated at midyear, approximating
the effect of economic benefits being generated evenly throughout the year.
Minority Discount—a discount for lack of control applicable to a minority interest.
Minority Interest—an ownership interest less than 50% of the voting interest in a
business enterprise.
Multiple—the inverse of the capitalization rate.
Net Book Value—with respect to a business enterprise, the difference between
total assets (net of accumulated depreciation, depletion, and amortization) and total
liabilities as they appear on the balance sheet (synonymous with Shareholder's
Equity). With respect to a specific asset, the capitalized cost less accumulated
eueazatey or depreciation as it appears on the books of account of the business
enterprise,
Net Cash Flows—when the term is used, it should be su
. ipplemented by a qualifier.
See Equity Net Cash Flows and Invested Capital NetCash Flows
Neus ceeent walle value, as of a specified date, of future cash inflows less all
o
Fa oatTions (including the cost of investment) calculated using an appropriate
Net Tangi
Tangible Asset Value—the value of the business enterprise's tangible assets
eat ev ae eee1 the value of its liabilities
(excluding excess assets and non-operating assets) minu
.g operations of the
Non-Operating Assets. on
—assets not necessary to ondONE TT dant Assets")
business enterprise. (NOTE: in Canada, the term used IS
Normalized Earnings—economic benefits adjusted for nonrecurring, noneconom"c:
or other unusual items to eliminate anomalies and/or facilitate comparisons
ted for nonoperating
Normalized Financial Statements—financial statements adjus
ther unusual items
“oe and liabilities and/or for nonrecurring, noneconomic, OF O'
to eliminate anomalies and/or facilitate comparisons.
Orderly Liquidation Value — liquidation value at which the asset or assets ar° sold
over @ reasonable period of time to maximize proceeds received
Premise of Value—an assumption regarding the most likely set of transactional
a that may be applicable to the subject valuation; e.g. going concern,
liquidation.
Present Value—ihe value, as of a specified date, of future economic benefits
and/or proceeds from sale, calculated using an appropriate discount rate.
Portfolio Discount—an amount or percentage deducted from the value of &
business enterprise to reflect the fact that it owns dissimilar operations or assets
that do not fit well together.
Price/Earnings Multiple—the price of a share of stock divided by its earnings per
share.
Rate of Return—an amount of income (loss) and/or change in value realized or
anticipated on an investment, expressed as a percentage of that investment.
Redundant Assets—see Non-Operating Assets
Report Date—the date conclusions are transmitted to the client
Replacement Cost New—the current cost of a similar new property having the
nearest equivalent utility to the property being valued
Reproduction Cost New—the current cost of an identical new property
Required Rate of Return—the minimum rate of return acceptable by investors
before they will commit money to an investment at a given level of risk.
Residual Value—the value as of the end of the discrete projection period in a
discounted future earnings model
Return on Equity—the amount, expressed as a percentage, eamed on a
company's common equity for a given period.
Fh asted Capital and Return on
ee Return ‘on Inve!
as a percentage, ear
Return on Investment—S'
he amount expressed
Return on inves
company’s total capital for a av manna
onal
Risk-Free Rate—he rate of return available in the market free
default risk
n added to @ risk-free rate to reflect risk.
jeveloped from the relationship between,
ervation, hearsay, OF a
Risk Premium—a rate of return
ila de
Rule of Thumb—2 mathematical formu!
price and certain variables based 0” experience, Obs!
Combination of these: usually industry specific.
believe they can enjoy post-
= acquirers who
Ea trategic advantages by combining the
Special Interest Purchas
ras Ss, OF SI
acquisition economies of scale, syneraie:
acquired business interest with their own
Standard of Value - the identification of the type
engagement; e.g. fair market value, fair value, inv
of value being utilized in a specific
estment value.
sustaining Capital Reinvestment — the periodic capital outlay required to maintain
operations at existing levels, net of the tax shield available from such outlays.
the risk that is common to all risky securities and cannot be
‘Systematic Risk -
ure of systematic risk in stocks is the
eliminated through diversification. The meas
beta coefficient.
Tangible Assets—physical assets (such as cash, accounts receivable, inventory,
property, plant and equipment, etc.)
Terminal Value—see Residual Value
Transaction Method—see Merger and Acquisition Method
Unlevered Beta ~ the beta reflecting a capital structure without debt.
Unsystematic Risk - the portion of total ri i ivi
Has teaches poUGN es isk specific to an individual security that
Valuation — the act or process of dete
lerminin
ownership interest, security, or intangible aS ee ee eae
Valuation Approach ~ a general
way of deter i
business, business ownership interest, securiy, OF Ren eae
Ge eichen mance or intangible asset using one oF
Valuation Date ~ the specific point in time
value applies (also referred to as "Effective Datos oh tne Valuator's conclusion of
Date" or "Ay
val a ppraisal Date”
luation Method — within approaches, a specific = aioe ).
letermine value.
eT)