2020-142: Estimating Long-Term Growth Rates in Times of Economic Uncertainty
**Webinar 142: Live Broadcast Date: April 16, 2020**
VPS StraightTalk Webinar Series: Estimating Long-Term Growth Rates in Times of Economic Uncertainty
Speakers: Robert F. Reilly, CPA/ABV, ASA, CFA, CVA and Kyle J. Wishing, CFA
Analysts are always estimating LTG rates in terms of economic uncertainty. During the current COVID-19 pandemic, we are experiencing more economic uncertainty than usual. This webinar will present practical guidance for developing relevant, reasonable, and replicable LTG rate estimates. In particular, this webinar will consider documentation and reporting procedures to make the analyst’s LTG rate estimate supportable, transparent, and credible.
Most analysts are familiar with this basic finance principle that considers expected long-term growth (LTG): Discount Rate – LTG Rate = Capitalization Rate
We apply that principle in just about every valuation analysis, damages analysis, and transfer price analysis.
In business and intangible asset valuation, we apply that principle in every income approach analysis.
We apply a discount rate (and a short-term growth rate) in every discounted cash flow (DCF) analysis.
We also apply the discount rate and the LTG rate in the DCF analysis terminal value calculation.
We apply the capitalization rate in every direct capitalization method analysis.
In the business valuation market approach, we consider relative LTG rates as an adjustment factor in selecting/applying GPTC pricing multiples.
In the business valuation asset-based approach, we consider discount rates, LTG rates, and capitalization rates in the MEEM analysis of customer-based intangible assets and the CEEM analysis of intangible value in the nature of goodwill.
In particular, this webinar will consider documentation and reporting procedures to make the analyst’s LTG rate estimate supportable, transparent, and credible.
The participant will learn:
- Understand that the LTG rate means “long-term” growth rate
- Consider incorporating the short-term economic uncertainty into other valuation variables—and not into the LTG rate
- Incorporate the implications of the LTG rate selection in the income approach—and the market approach and the asset-based approach—analysis
- Document and report the LTG rate development and selection process
- Present a clear, convincing, and cogent explanation of the LTG rate in a litigation (or other contrarian) environment
- Selecting an LTG rate consistent with the level of income (including the level of taxation) to be capitalized
- Converting between pre-tax and after-tax discount/capitalization rates
- Developing LTG rates based on benchmark comparisons
- Subject company history
- Management projections
- GPTC history
- GPTC analyst forecasts
- Industry data sources
- Economic data sources (GNP growth plus inflation rate)
- Testing LTG rate consistency with income projections
- Capital expenditures
- Depreciation expense
- Working capital investments
- SG&A expense
- R&D expense
- Selecting a short-term growth (STG) rate versus an LTG rate
- Discrete projection period versus terminal period
- STG rate data sources versus LTG rate data sources
- Considering the application of a two-stage growth rate model
- Bridging from an STG rate to an LTG rate
- Considering other valuation analysis adjustments for economic uncertainty
- DLOM/discount for illiquidity
- Exposure/marketing time
- CSRP considerations
- Measuring cash equivalency value
- Adjusting market approach GPTC pricing multiples for relative LTG rate
- Adjusting asset-based approach customer-based intangible asset and goodwill valuations for LTG rate
Handouts include a copy of the slides and a copy of Chapter 5 from “Best Practices – Thought Leadership in Valuation, Damages, and Transfer Price Analysis” by Robert F. Reilly and Robert P. Schweihs. See https://www.valuationproducts.com/best-practices for more information.
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