Thursday, April 16, 2020
1:00 – 3:00 EDT
Estimating Long-Term Growth Rates
in Times of Economic Uncertainty
Analysts estimate long-term growth (LTG) rates in terms of economic uncertainty. During the current COVID-19 pandemic, we are experiencing more economic uncertainty than usual. Robert Reilly and co-presenter Kyle Wishing will offer practical guidance for developing relevant, reasonable, and replicable LTG rate estimates.
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 particular, this webinar will consider documentation and reporting procedures to make the analyst’s LTG rate estimate supportable, transparent, and credible.
Robert F. Reilly, CPA/ABV, ASA, CFA, CVA
Managing Director, Willamette Management Associates
- Practice includes valuation services, damages measurements, and transfer price analyses
- Performs analyses for transaction pricing and structuring, taxation planning and compliance, and controversy resolution and testifying expert purposes
- Member of multiple appraisal, financial, and accounting associations
- Co-author with Robert Schweihs of the recently published text Best Practices – Thought Leadership in Valuation, Damages, and Transfer Price Analysis
Kyle J. Wishing, CFA
Manager, Willamette Management Associates
- Works primarily on ESOP-related valuation engagements
- Practice includes valuation and economic analyses for taxation planning and compliance, financial reporting, forensic analysis and dispute resolution, marital dissolution, and strategic information and corporate planning purposes
- Serves as a vice president of the New South chapter of the ESOP Association
- Member of the CFA Institute, the Atlanta Society of Finance and Investment Professionals (ASFIP), and the National Center for Employee Ownership (NCEO)
The participant will:
- 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
Participants will be able to download the following:
- VPS webinar PowerPoint slides
- Related articles
Following the webinar, attendees will receive an interactive video of the webinar showing the audio synced to the slide presentation in real time
Jim Hitchner’s Valuation Products and Services (VPS) provides tools to assist practitioners in business valuation, litigation services, and forensics and fraud.
Valuation Products and Service, LLC is registered with the National Association of State Boards of Accountancy (NASBA) as a sponsor of continuing professional education on the National Registry of CPE Sponsors. State boards of accountancy have final authority on the acceptance of individual courses for CPE credit. Complaints regarding registered sponsors may be addressed to the National Registry of CPE Sponsors, 150 Fourth Avenue North, Suite 700, Nashville, TN, 37219-2417. Web site: www.nasba.org.