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- Herausgeber: John Wiley & Sons
- Kategorie: Fachliteratur
- Serie: Wiley Finance
- Sprache: Englisch
A complete toolkit for financial valuators to help keep their engagements on-track and on-time
In the newly revised fifth edition of Financial Valuation Workbook: Step-by-Step Exercises and Tests to Help You Master Financial Valuation, veteran valuation expert James R. Hitchner delivers a comprehensive collection of checklists, reports, information request templates, and other tools designed to assist valuation practitioners in the organization of their engagements. In the book, you'll find intuitively organized materials that cut the learning curve for newly minted valuation professionals in half.
The tools contained within follow the standard valuation engagement format and track the intricacies of the typical valuation assignment. Over 300 exercises—organized by major subject—are included to assist with the learning process. You'll also find:
- Updated sections on S-corps, discounts for lack of marketability, and cost of capital resources and applications
- Report writing aids, discussions of individual vs. corporate tax rates, and guides for engaging in depositions and trials as an expert witness
- Materials designed to assist with the difference between capitalized cash flow and discounted cash flow methods
Perfect for business valuation analysts and expert witnesses, Certified Public Accountants, and appraisers, the Financial Valuation Workbook will also be an indispensable resource for attorneys working with financial valuation experts as they aim to keep their engagements on-track, on-time, and on-budget.
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Table of Contents
COVER
TABLE OF CONTENTS
TITLE PAGE
COPYRIGHT
DEDICATION
PREFACE
ACKNOWLEDGMENTS
ABOUT THE AUTHOR
CHAPTER 1: Valuation Case Study Exercises
1.1 INTRODUCTION
1.2 THE VALUATION REPORT
1.3 HISTORY AND NATURE OF BUSINESS
15
1.4 GENERAL ECONOMIC AND INDUSTRY OUTLOOK
1.5 BOOK VALUE AND FINANCIAL POSITION
1.6 PROJECTIONS
1.7 APPROACHES TO VALUE
1.8 INCOME APPROACH
1.9 COST OF CAPITAL
1.10 MARKET APPROACH
1.11 GUIDELINE PUBLIC COMPANY METHOD
1.12 GUIDELINE COMPANY TRANSACTIONS METHOD
1.13 RECONCILIATION OF VALUATION METHODS
1.14 CONCLUSION OF VALUE
1.14 ADDENDUM: DISCOUNT CASE STUDY EXERCISES
Notes
CHAPTER 2: Valuation Case Study Exercises: Solutions and Explanations
2.1 ADDENDUM: DISCOUNT CASE STUDY EXERCISES
CHAPTER 3:
Financial Valuation Applications and Models
Companion Exercises and Test Questions
3.1 CHAPTER 1: INTRODUCTION TO FINANCIAL VALUATION
3.2 CHAPTER 2: STANDARDS OF VALUE
3.3 CHAPTER 3: RESEARCH AND ITS PRESENTATION
3.4 CHAPTER 4: FINANCIAL STATEMENT AND COMPANY RISK ANALYSIS
3.5 CHAPTER 5: INCOME APPROACH
3.6 CHAPTER 6: COST OF CAPITAL/RATES OF RETURN
3.7 CHAPTER 7: INTERNATIONAL COST OF CAPITAL
3.8 CHAPTER 8: MARKET APPROACH
3.9 CHAPTER 9: ASSET APPROACH
3.10 CHAPTER 10: VALUATION DISCOUNTS AND PREMIUMS
3.11 CHAPTER 11: REPORT WRITING
3.12 CHAPTER 12: BUSINESS VALUATION STANDARDS
3.13 CHAPTER 13: VALUATION OF PASS‐THROUGH ENTITIES
3.14 CHAPTER 27D: VALUATION ISSUES IN PREFERRED STOCK
3.15 CHAPTER 27E: RESTRICTED STOCK VALUATION
3.16 CHAPTER 27G: VALUATION ISSUES RELATED TO STOCK OPTIONS AND OTHER SHARE‐BASED COMPENSATION
3.17 CHAPTER 14: ESTATE, GIFT, AND INCOME TAX VALUATIONS
3.18 CHAPTER 15: VALUATION OF FAMILY LIMITED PARTNERSHIPS
3.19 CHAPTER 16: SUMMARY OF COURT CASE VALUATION ISSUES
3.20 CHAPTER 17: SHAREHOLDER DISPUTES
3.21 CHAPTER 18: EMPLOYEE STOCK OWNERSHIP PLANS
3.22 CHAPTER 19: VALUATION IN THE DIVORCE SETTING
3.23 CHAPTER 20: VALUATION ISSUES IN SMALL BUSINESSES
3.24 CHAPTER 21: VALUATION ISSUES IN PROFESSIONAL PRACTICES
3.25 CHAPTER 22: REASONABLE COMPENSATION
3.26 CHAPTER 23: THE VALUATOR AS EXPERT WITNESS
3.27 CHAPTER 24: FAIR VALUE MEASUREMENT AND THE VALUATION OF INTANGIBLE ASSETS
3.28 CHAPTER 25: MARKETING, MANAGING, AND MAKING MONEY IN A VALUATION SERVICES GROUP
3.29 CHAPTER 26: BUSINESS DAMAGES
3.30 CHAPTER 27: OTHER VALUATION SERVICE AREAS
3.31 CHAPTER 28: VALUATION OF HEALTHCARE SERVICE BUSINESSES
3.32 CHAPTER 29: DETERMINATION OF COMPENSATION IN THE HEALTHCARE INDUSTRY
3.33 CHAPTER 30: SPECIAL INDUSTRY VALUATIONS
3.34 CHAPTER 31: BUY‐SELL AGREEMENTS
3.35 CHAPTER 32: VALUATION VIEWS AND CONTROVERSIAL ISSUES: AN ILLUSTRATION
CHAPTER 4: ValTips
4.1 INTRODUCTION
4.2 CHAPTER 1: INTRODUCTION TO FINANCIAL VALUATION
4.3 CHAPTER 2: STANDARDS OF VALUE
4.4 CHAPTER 3: RESEARCH AND ITS PRESENTATION
4.5 CHAPTER 4: FINANCIAL STATEMENT AND COMPANY RISK ANALYSIS
4.6 CHAPTER 5: INCOME APPROACH
4.7 CHAPTER 6: COST OF CAPITAL/RATES OF RETURN
4.8 CHAPTER 7: INTERNATIONAL COST OF CAPITAL
4.9 CHAPTER 8: MARKET APPROACH
4.10 CHAPTER 9: ASSET APPROACH
4.11 CHAPTER 10: VALUATION DISCOUNTS AND PREMIUMS
4.12 CHAPTER 11: REPORT WRITING
4.13 CHAPTER 12: BUSINESS VALUATION STANDARDS
4.14 CHAPTER 13: VALUATION OF PASS‐THROUGH ENTITIES
4.15 CHAPTER 14: ESTATE, GIFT, AND INCOME TAX VALUATIONS
4.16 CHAPTER 15: VALUATION OF FAMILY LIMITED PARTNERSHIPS
4.17 CHAPTER 16: SUMMARY OF COURT CASE VALUATION ISSUES
4.18 CHAPTER 17: SHAREHOLDER DISPUTES
4.19 CHAPTER 18: EMPLOYEE STOCK OWNERSHIP PLANS
4.20 CHAPTER 19: VALUATION IN THE DIVORCE SETTING
4.21 CHAPTER 20: VALUATION ISSUES IN SMALL BUSINESSES
4.22 CHAPTER 21: VALUATION ISSUES IN PROFESSIONAL PRACTICES
4.23 CHAPTER 22: REASONABLE COMPENSATION
4.24 CHAPTER 23: THE VALUATOR AS EXPERT WITNESS
4.25 CHAPTER 24: FAIR VALUE MEASUREMENT AND THE VALUATION OF INTANGIBLE ASSETS
4.26 CHAPTER 25: MARKETING, MANAGING, AND MAKING MONEY IN A VALUATION SERVICES GROUP
4.27 CHAPTER 26: BUSINESS DAMAGES
4.28 CHAPTER 27: OTHER VALUATION SERVICE AREAS
4.29 CHAPTER 28: VALUATION OF HEALTHCARE SERVICE BUSINESSES
4.30 CHAPTER 29: DETERMINATION OF COMPENSATION IN THE HEALTHCARE INDUSTRY
4.31 CHAPTER 30: SPECIAL INDUSTRY VALUATIONS
4.32 CHAPTER 31: BUY‐SELL AGREEMENTS
4.33 CHAPTER 32: VALUATION VIEWS
Notes
CHAPTER 5: Income Approach Valuation Process Flowchart
5.1 INTRODUCTION
5.2 INCOME APPROACH VALUATION PROCESS FLOWCHART
Note
CHAPTER 6: Marketing, Managing, and Making Money in Valuation Services
6.1 SMART “MULTI‐MARKETING”: LEVERAGING YOUR EFFORT—SELLING AND NETWORKING BEYOND ONE‐ON‐ONE
6.2 RISK MANAGEMENT: ENGAGEMENT LETTERS, REPORTS, AND TURNING DOWN WORK
6.3 ENGAGEMENT LETTER AND REPORT LANGUAGE EXAMPLES
6.4 ASSUMPTIONS AND LIMITING CONDITIONS EXAMPLES
6.5 KEEPING UP TECHNICALLY
6.6 PRACTICE BENCHMARKS FOR PRODUCTIVITY, BILLINGS, REALIZATION, AND THE BOTTOM LINE
6.7 FINDING, TRAINING, AND RETAINING THE RIGHT STAFF FOR YOUR PRACTICE
6.8 DELEGATE LITIGATION ENGAGEMENTS TO STAFF
6.9 APPENDIX 6.1: SAMPLE GIBRALTAR E‐FLASH COVER SHEET
6.10 APPENDIX 6.2: SAMPLE GIBRALTAR E‐FLASH
6.11 APPENDIX 6.3: SAMPLE CONTROL SHEET
CHAPTER 7: Practice Management Workflow Procedures
7.1 INTRODUCTION
7.2 SECTION I—PRACTICE MANAGEMENT FLOWCHARTS
7.3 SECTION II—PRACTICE MANAGEMENT WORKFLOW PROCESS
Note
Chapter 8: Checklists
CHECKLIST 8.1: BUSINESS VALUATION OR REAL ESTATE APPRAISAL?
CHECKLIST 8.2: KEY INFORMATION REQUIREMENTS
CHECKLIST 8.3: INDUSTRY RESEARCH FORM
CHECKLIST 8.4: IRS BV GUIDELINES CHECKLIST, INTERNAL REVENUE SERVICE, ENGINEERING PROGRAM, BUSINESS VALUATION GUIDELINES 4.48.4
CHECKLIST 8.5: VALUATION INFORMATION REQUEST (VIR) GENERAL
CHECKLIST 8.6: VALUATION INFORMATION REQUEST (VIR)BANK/HOLDING COMPANY
CHECKLIST 8.7: VALUATION INFORMATION REQUEST (VIR)EMINENT DOMAIN
CHECKLIST 8.8: VALUATION INFORMATION REQUEST (VIR) GAS AND OIL RIGHTS
CHECKLIST 8.9: VALUATION INFORMATION REQUEST (VIR) HIGH‐TECH BUSINESS
CHECKLIST 8.10: VALUATION INFORMATION REQUEST (VIR) PROFESSIONAL PRACTICE
CHECKLIST 8.11: VALUATION INFORMATION REQUEST (VIR) MEDICAL PRACTICE
CHECKLIST 8.12: VALUATION INFORMATION REQUEST (VIR) CONSTRUCTION INDUSTRY
CHECKLIST 8.13: MANAGEMENT INTERVIEW—OPERATIONS
CHECKLIST 8.14: MANAGEMENT INTERVIEW—FINANCIAL REVIEW
CHECKLIST 8.15: MANAGEMENT INTERVIEW—INSURANCE AGENCY
CHECKLIST 8.16: MANAGEMENT INTERVIEW—PROFESSIONAL PRACTICE
CHECKLIST 8.17: MANAGEMENT INTERVIEW—MEDICAL PRACTICE
CHECKLIST 8.18: MANAGEMENT INTERVIEW—CONSTRUCTION INDUSTRY
CHECKLIST 8.19: MANAGEMENT INTERVIEW—LAW PRACTICE
CHECKLIST 8.20: MANAGEMENT INTERVIEW—ACCOUNTING PRACTICE
CHECKLIST 8.21: VALUATION INFORMATION REQUEST (VIR) COPYRIGHTS
CHECKLIST 8.22: VALUATION INFORMATION REQUEST (VIR) CUSTOMER RELATIONSHIPS
CHECKLIST 8.23: VALUATION INFORMATION REQUEST (VIR) IN‐PROCESS RESEARCH AND DEVELOPMENT
CHECKLIST 8.24: VALUATION INFORMATION REQUEST (VIR) KNOW‐HOW
CHECKLIST 8.25: VALUATION INFORMATION REQUEST (VIR) PATENTS
CHECKLIST 8.26: VALUATION INFORMATION REQUEST (VIR) SOFTWARE
CHECKLIST 8.27: VALUATION INFORMATION REQUEST (VIR) PROPRIETARY PROCESS/PRODUCTS TECHNOLOGY
CHECKLIST 8.28: VALUATION INFORMATION REQUEST (VIR) TRADEMARK/TRADE NAME
CHECKLIST 8.29: PROCEDURES FOR THE VALUATION OF INTANGIBLE ASSETS
CHECKLIST 8.30: ROYALTY FACTORS
CHECKLIST 8.31: MANAGEMENT INTERVIEW—PATENT VALUATION
CHECKLIST 8.32: MANAGEMENT INTERVIEW—REASONABLE COMPENSATION
CHECKLIST 8.33: REASONABLE COMPENSATION: ADDITIONAL DISCUSSION QUESTIONS
CHECKLIST 8.34: REVENUE RULING 59‐60: VALUATION CHECKLIST
CHECKLIST 8.35: REVENUE RULING 77‐287: VALUATION CHECKLIST
CHECKLIST 8.36: REVENUE RULING 93‐12: VALUATION CHECKLIST
CHECKLIST 8.37: WORK PROGRAM
CHECKLIST 8.38: SSVS VS SECTION 100 COMPLIANCE CHECKLIST—VALUATION ENGAGEMENT
CHECKLIST 8.39: SSVS VS SECTION 100 COMPLIANCE CHECKLIST—DETAILED REPORT (VALUATION ENGAGEMENT)
CHECKLIST 8.40: REVIEW CHECKLIST—EMINENT DOMAIN
CHECKLIST 8.41: NON‐APPRAISER'S GUIDE TO REVIEWING BUSINESS VALUATION REPORTS
CHECKLIST 8.42: AUDITOR REVIEW OF VALUATION FOR FINANCIAL REPORTING
CHECKLIST 8.43: FAIR VALUE MEASUREMENT CHECKLIST
Notes
ABOUT THE WEBSITE
INDEX
END USER LICENSE AGREEMENT
List of Tables
Chapter 1
EXHIBIT 1.1 Executive Management
EXHIBIT 1.2 Ownership
TABLE 1.1 FOMC Summary of Economic Projections
EXHIBIT 1.3 Comparative Income Statement
EXHIBIT 1.4 Comparative Balance Sheet
EXHIBIT 1.5 Adjusted Comparative Income Statement
EXHIBIT 1.6 Adjusted Ratio Analysis
EXHIBIT 1.7 Management's Projections
EXHIBIT 1.8 Capitalized Cash Flow to Invested Capital Method (Illustration ...
EXHIBIT 1.9 Debt‐Free Working Capital (DFWC)—Benchmark Data Analysis...
EXHIBIT 1.10 Debt‐Free Working Capital (DFWC) Statistics
EXHIBIT 1.11 Discounted Cash Flow to Invested Capital Method
EXHIBIT 1.12 Discounted Cash Flow Method: Calculation Of Incremental Debt‐F...
EXHIBIT 1.13 Discounted Cash Flow Method: Calculation Of Depreciation Overh...
EXHIBIT 1.14 Cost of Equity
EXHIBIT 1.15 Comparison to Historical Equity Risk Premiums by Characteristi...
EXHIBIT 1.16 Comparison to Historical Equity Risk Premiums Ranked by Risk M...
EXHIBIT 1.17 Industry Beta Analysis
EXHIBIT 1.18 Weighted Average Cost of Capital
EXHIBIT 1.19 Guideline Public Company Method: Ranking of Market Multiples...
EXHIBIT 1.20 Guideline Public Company Method: Comparative Financial Analysi...
EXHIBIT 1.21 Guideline Public Company Method: Detail by Company
EXHIBIT 11.22 Guideline Public Company Method: Summary
EXHIBIT 1.23 Guideline Company Transactions Method: Detail
EXHIBIT 1.24 Guideline Company Transactions Method: Summary
EXHIBIT 1.25 Summary of Findings
Chapter 7
EXHIBIT 7.1 Contact Information Sheet
EXHIBIT 7.2 Relationship Review Checklist Instructions
EXHIBIT 7.3 Engagement Declination Letter
EXHIBIT 7.4 Lead and Project Information Sheet
EXHIBIT 7.5 Marketing Letter
EXHIBIT 7.6 Lead Schedule
EXHIBIT 7.7 Lead Follow‐Up Letter Date
EXHIBIT 7.8 Representation and Engagement Letter Cover Letter Date
EXHIBIT 7.10 Representation and Engagement Letter Follow‐Up Letter
EXHIBIT 7.11 New Client Set‐up Checklist
EXHIBIT 7.12 Management Schedule Report
EXHIBIT 7.14 New Client Exhibit Request
EXHIBIT 7.15 Math Review Checklist
EXHIBIT 7.16 Internal Report Sign‐Off Sheet
EXHIBIT 7.17 Contact Information Summary
EXHIBIT 7.18 New Client Report Request
EXHIBIT 7.19 Word Processing Checklist
EXHIBIT 7.20 Cover Page for Report
EXHIBIT 7.21 Final Review Checklist
EXHIBIT 7.22 Report Cover Letter Date
EXHIBIT 7.23 Early Termination Letter Date
List of Illustrations
Chapter 7
EXHIBIT 7.9 Engagement Letter Schedule
EXHIBIT 7.13 Document Control System Report
Guide
COVER
TABLE OF CONTENTS
TITLE PAGE
COPYRIGHT
DEDICATION
PREFACE
ACKNOWLEDGMENTS
ABOUT THE AUTHOR
BEGIN READING
ABOUT THE WEBSITE
INDEX
WILEY END USER LICENSE AGREEMENT
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Financial Valuation Workbook
Step‐by‐Step Exercises and Tests to HelpYou Master Financial Valuation
Fifth Edition with Website
JAMES R. HITCHNER
Copyright © 2025 by James R. Hitchner. All rights reserved.
Published by John Wiley & Sons, Inc., Hoboken, New Jersey.Published simultaneously in Canada.
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Library of Congress Cataloging‐in‐Publication Data
Names: Hitchner, James R., author.
Title: Financial valuation workbook : step‐by‐step exercises and tests to help you master financial valuation / James R. Hitchner.
Description: Fifth edition. | Hoboken, New Jersey : Wiley, [2025] | Revised edition of the author’s Financial valuation workbook, 2011.
Identifiers: LCCN 2024011133 (print) | LCCN 2024011134 (ebook) | ISBN 9781119880974 (paperback) | ISBN 9781119880998 (adobe pdf) | ISBN 9781119880981 (epub)
Subjects: LCSH: Corporations—Valuation. | Corporations—Valuation—Handbooks, manuals, etc. | Business enterprises—Valuation. | Business enterprises—Valuation—Handbooks, manuals, etc.
Classification: LCC HG4028.V3 H585 2025 (print) | LCC HG4028.V3 (ebook) | DDC 658.15/5—dc23/eng/20240308
LC record available at https://lccn.loc.gov/2024011133
LC ebook record available at https://lccn.loc.gov/2024011134
Cover Design: WileyCover Image: © Blake Callahan/Getty Images
To my son, Jason Earle Hitchner, and my godmother, Aunt Thelma ReidAlso to my seven grandchildren: Sienna, Brooke, Eliana, Grace, Nick, Vivienne, and Lucy
Preface
The Financial Valuation Workbook (FVW) contains both educational exercises that guide the reader through a complete business valuation and valuation tools that professionals can use in preparing business valuations. It also contains detailed information on how to run a successful valuation practice. It is structured to be used on a stand‐alone basis. It is also a companion text to Financial Valuation Applications and Models, 5th edition (FVAM) (John Wiley & Sons), in which the subject matter contained in the workbook is expanded on. This workbook contains basic, intermediate, and advanced topics on valuing businesses conveyed in a series of easily understandable exercises with comprehensive answers.
FVW is targeted to the following professionals and groups that are typically exposed to financial valuation issues:
Appraisers
Appraisal associations and societies
Actuaries
Attorneys
Bankers
Business brokers
Business executives, including CEOs, CFOs, and tax directors
Business owners
CPAs
Estate and gift planners
Financial analysts
Government agencies including the IRS, SEC, and DOL
Insurance agents
Investment advisors
Investment bankers
Judges
Pension administrators
Stockbrokers
FVW contains eight chapters, each with a different purpose.
Chapter 1 contains about 80 exercises that have been placed throughout excerpts of an actual business valuation report presenting numerous valuation topics, including rates of return, the capitalized cash flow and discounted cash flow methods of the income approach, and the guideline company transaction and guideline public company methods of the market approach.
Chapter 2 contains comprehensive answers to the exercises in Chapter 1.
Chapter 3 includes more than 300 exercises that comprise a companion piece and correlate to the relevant chapters of FVAM, 5th edition. These exercises/tests can be used to prepare for business valuation certification exams or for university professors in the academic field or as reinforcement to learn the material.
Chapter 4 includes more than 450 ValTips that are extracted from the companion book, FVAM. This summary of ValTips can serve professionals as a quick reference source of important concepts, application issues, and pitfalls to avoid.
Chapter 5 presents a Valuation Process Flowchart to allow professionals to follow a more structured process in applying and documenting the income approach.
Chapter 6 highlights strategies for marketing, managing, and making money in a valuation services practice. It discusses risk management in regard to reports and engagement letters, and gives examples of each. This chapter also includes information on how to keep up technically; find, train, and retain staff; and delegate authority.
Chapter 7 includes guidelines for practice management workflow procedures, which starts with the initial prospective client call, highlights checking points through the valuation analysis, then moves on to draft and final record, then to file retention and engagement closure.
Chapter 8 includes more than 40 checklists that can be used by professionals in documenting their valuations. It can also be used by less‐experienced professionals as a guide in applying valuation concepts.
This book also includes a companion website, which can be found at www.wiley.com/go/fvamwb5e. The website includes the exhibits and forms found in Chapter 7, and the checklists found in Chapter 8.
Financial valuations are very much affected by specific facts and circumstances. As such, the views expressed in these written materials do not necessarily reflect the professional opinions or positions that the author would take in every business valuation assignment, or in providing business valuation services in connection with an actual litigation matter. Every situation is unique and differing facts and circumstances may result in variations of the applied methodologies. Furthermore, valuation theory, applications, and methods are continually evolving and, at a later date, may be different from what is presented here.
Nothing contained in these written materials shall be construed to constitute the rendering of valuation advice, the rendering of a valuation opinion, the rendering of an opinion as to the propriety of taking a particular valuation position, or the rendering of any other professional opinion or service.
Business valuation services are necessarily fact‐sensitive, particularly in a litigation context. Therefore, the author urges readers to apply their expertise to particular valuation fact patterns that they encounter, or to seek competent professional assistance as warranted in the circumstances.
Disclaimer Excluding Any Warranties: This book is designed to provide guidance to analysts, auditors, management, and other professionals, but it is not to be used as a substitute for professional judgment. Procedures must be altered to fit each assignment. The reader takes sole responsibility for implementation of material from this book. The implied warranties of merchantability and fitness of purpose and all other warranties, whether expressed or implied, are excluded from this transaction, and shall not apply to this book. None of the authors, editors, reviewers, or publisher shall be liable for any indirect, special, or consequential damages.
Acknowledgments
Several people were instrumental in preparing this book. Thank you, Kate Morris, ASA, ABV, MBA, and Karen Warner and Janet Kern of Valuation Products and Services, LLC, in Ventnor City, New Jersey. You were all great.
I would also like to thank Mike Mard, CPA/ABV, of The Financial Valuation Group of Florida, Inc., for his important contributions to the first three editions of this book.
I would also like to thank all the coauthors of Financial Valuation Applications and Models, 5th edition:
R. James Alerding, CPA/ABV
Rosanne J. Aumiller, CPA/ABV/CFF, ASA
G. Don Barbo, CPA/ABV
Neil J. Beaton, CPA/ABV/CFF, CFA, ASA
Mark Bello, CPA/ABV/CFF, CVA, MAFF, MST
Erica Bramer, CFA, CVA, CIRA
James T. Budyak, CPA/ABV, CFA, ASA
Karolina Calhoun, CPA/ABV/CFF
Carol Carden, CPA/ABV, ASA, CFE
Larry R. Cook, CPA/ABV/CFF, CBA, CVA
Don M. Drysdale, CPA/ABV, ASA
Edward J. Dupke, CPA/ABV/CFF/CGMA, ASA
Jay E. Fishman, FASA
Michelle Gallagher, CPA/ABV/CFF
Chris Hamilton, CPA, CFE, CVA
Bethany Hearn, CPA/ABV/CFF
Ted Israel, CPA/ABV/CFF
Harold G. Martin Jr., CPA/ABV/CFF, ASA, CFE
Lari Masten, CPA/ABV/CFF, CPVA, CVA, MAFF, ABAR
Raymond E. Moran, ASA, MRICS
Katherine E. Morris, ASA, ABV, MBA
Alina Niculita, ASA, CFA, ARM‐BV
Maureen Rutecki, CPA/ABV/CFF, ASA
Greg Saunders, CPA/ABV, ASA
Ronald L. Seigneur, CPA/ABV/CFF, ASA, CVA
Mark Smith, CPA
Stacey D. Udell, CPA/ABV/CFF, CVA
Samuel Y. Wessinger, ABV
Laurie‐Leigh White, CPA/ABV, ASA, CEIV
Richard M. Wise, CPA, FCA, FCBV, FASA, MCBA, CFF, CVA, C.Arb., EJC, FRICS
Kevin R. Yeanoplos, CPA/ABV/CFF, ASA
About the Author
James R. Hitchner, CPA/ABV/CFF, is the managing director of Financial Valuation Advisors, Inc., in Ventnor City, New Jersey. He is also president of the Financial Consulting Group, LLC, a national association of professional services firms dedicated to excellence in valuation, financial, and litigation/forensic consulting. He is CEO of Valuation Products and Services, LLC, a company that develops educational resources for valuation analysts and fraud/forensics practitioners. He holds the American Institute of Certified Public Accountants (AICPA) specialty designations of Accredited in Business Valuation (ABV) and Certified in Financial Forensics (CFF). Mr. Hitchner has more than 44 years of experience in valuation services. He has often testified as a qualified expert witness on valuations in federal and state courts in numerous states.
He has coauthored more than 20 courses, taught more than 60 courses, published more than 150 articles, and made more than 400 conference presentations and webinars. Mr. Hitchner is editor/coauthor of the book Financial Valuation Applications and Models (FVAM), 5th edition (2025); coauthor of the book Financial Valuation Workbook (FVW), 5th edition (2025); and coauthor of the book Valuation for Financial Reporting: Fair Value, Business Combinations, Intangible Assets, Goodwill, and Impairment Analysis, 3rd edition (2011)—all published by John Wiley & Sons. He is coauthor of PPC's Guide to Business Valuations, 18th through 31st editions, published by Thomson Reuters, and coauthor of A Consensus View, Q&A Guide to Financial Valuation (2016), and the Discount for Lack of Marketability Guide and Toolkit, (2017), published by Valuation Products and Services, LLC. He is editor in chief of Hardball with Hitchner, a monthly journal that presents views and tools from some of the leading experts in valuation, forensics/fraud, and litigation services.
Mr. Hitchner is an inductee in the AICPA Business Valuation Hall of Fame and was twice a recipient of the AICPA's Business Valuation Volunteer of the Year award. He was also one of the only four members of the original AICPA Business Valuation Standards Writing Task Force and served the entire six years up to the June 2007 official release of the standards. Mr. Hitchner is past chairman of the Business Valuation Committee of the Georgia Society of CPAs, past member of the AICPA Business Valuation Subcommittee, past member of the AICPA ABV Exam Committee, and past chairman of the ABV Exam Review Course Committee. He has a Bachelor of Science degree in engineering from the University of Pittsburgh and Master of Business Administration degree from Rider University.
CHAPTER 1Valuation Case Study Exercises
1.1 INTRODUCTION
The purpose of this chapter is to highlight and discuss important concepts in valuation through a series of Exercises. These Exercises have been intermittently placed in excerpts of a valuation report. You should attempt to complete these Exercises as you read the report with reasoning and emphasis on an explanation of your conclusion. The authors' solutions to these Exercises can be found in Chapter 2.
The following case presents selected excerpts from a business valuation report that, in its entirety, was in full compliance with the AICPA's Statements on Standards for Valuation Services VS Section 100 and the Uniform Standards of Professional Appraisal Practice. For more information on reports and standards compliance, see Chapters 11 and 12 of Financial Valuation Applications and Models, 5th edition. This report format is one of many that analysts can use in presenting business valuations. The schedules have been included and are referenced throughout. Some of the terms, numbers, sources, and other data have been changed for ease of presentation.
1.2 THE VALUATION REPORT
February 15, 2023
Sherman E. Hitchner, Esq. Hitchner & Wessinger 4747 Washington Street, Suite 1740 St. Louis, Missouri 12345
Re: Fair Market Value of a 100 Percent Equity Interest in Nova Fastener & Tool, Inc. as of December 1, 2022
Dear Mr. Hitchner:
At your request XYZ Appraisal Associates LLC (XYZ) was retained to prepare a valuation analysis and appraisal (valuation engagement and conclusion of value) and detailed/comprehensive appraisal report (the report) to assist you and your client, Ms. Louise Atkins, in the determination of the fair market value of a 100 percent equity interest in Nova Fastener & Tool, Inc. (Nova or the Company).
This interest is a controlling interest and is therefore marketable. The value conclusion is considered as a cash or cash‐equivalent value. The valuation date is December 1, 2022 (the valuation date). This valuation and report are to be used only as of this date and are not valid as of any other date.
EXERCISE 1 Which of the following is the as of date for valuation?
Any time within one year
As of a single point in time
As of a single point in time or six months later
Date that the report is signed
We have prepared a valuation engagement and present our detailed report in conformity with the Statements on Standards for Valuation Services VS Section 100 (SSVS) of the American Institute of Certified Public Accountants (AICPA). SSVS defines a valuation engagement as
an engagement to estimate value in which a valuation analyst determines an estimate of the value of a subject interest by performing appropriate procedures, as outlined in the AICPA Statements on Standards for Valuation Services, and is free to apply the valuation approaches and methods he or she deems appropriate in the circumstances. The valuation analyst expresses the results of the valuation engagement as a conclusion of value, which may be either a single amount or a range.1
SSVS addresses a detailed report as follows:
The detailed report is structured to provide sufficient information to permit intended users to understand the data, reasoning, and analyses underlying the valuation analyst's conclusion of value.2
EXERCISE 2 This is a detailed report per SSVS. What other types of reports are allowed under SSVS?
______________________________________________________________
______________________________________________________________
______________________________________________________________
This valuation was prepared to assist in the determination of the value solely for purposes of internal operational and tax planning, and the resulting estimate of value should not be used for any other purpose, or by any other party for any purpose, without our express written consent.
EXERCISE 3 The purpose of the valuation of Nova is to assist management in internal operational and tax planning. What other purposes are there?
__________________________________________________
__________________________________________________
__________________________________________________
Our analysis and report are in conformance with the 2020–2021 (extended to 2022 and 2023) Uniform Standards of Professional Appraisal Practice (USPAP) promulgated by the Appraisal Standards Board of the Appraisal Foundation,3 the ethics and standards of the American Society of Appraisers (ASA), IRS business valuation development and reporting guidelines, and the National Association of Certified Valuators and Analysts (NACVA).
EXERCISE 4 If the analyst belongs to more than one valuation organization with standards, that analyst must comply with the standards of each organization they belong to.
True
False
Our analysis is also in conformance with Revenue Ruling 59‐60, which outlines the approaches, methods, and factors to be considered in valuing shares of capital stock in closely held corporations for federal tax purposes. Revenue Ruling 59‐60 is often also considered as useful guidance in valuations performed for nontax purposes.
EXERCISE 5 Revenue Ruling 59‐60 is only applicable to estate, gift, and income tax valuations.
True
False
The standard of value is fair market value, defined in Revenue Ruling 59‐60 as
the price at which the property would change hands between a willing buyer and a willing seller when the former is not under any compulsion to buy and the latter is not under any compulsion to sell, both parties having reasonable knowledge of relevant facts.4
Revenue Ruling 59‐60 also defines the willing buyer and seller as hypothetical as follows:
Court decisions frequently state in addition that the hypothetical buyer and seller are assumed to be able, as well as willing, to trade and to be well informed about the property and concerning the market for such property.5
Furthermore, fair market value assumes that the price is transacted in cash or cash equivalents. Revenue Ruling 59‐60, although used in tax valuations, is also used in many nontax valuations.
Fair market value is also defined in a similar way in the SSVS6 as
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 arm's 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.
EXERCISE 6 Which of these are standards of value?
Fair market value, fair value financial reporting, investment value
Fair value investment reporting, fair value state actions, intrinsic value
Investment value, intrinsic value, equal value
Fair market value, equal value, investment value
The premise of value is going concern. The 2001 International Glossary of Business Valuation Terms defines going concern as “an ongoing operating business enterprise,” and going concern value as
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.7
The 2022 International Valuation Glossary–Business Valuation defines going concern the same way and defines going concern value as
a Premise of Value that assumes the business is an ongoing commercial enterprise with a reasonable expectation of future earning power.8
The liquidation premise of value was considered and rejected as not applicable, as the going‐concern value results in a higher value for the interest than the liquidation value, whether orderly or forced.
In our conclusion of value, we considered the following relevant factors, which are specified in Revenue Ruling 59‐60:9
The history and nature of the business
The economic outlook of the United States and that of the specific industry in particular
The book value of the subject company's stock and the financial condition of the business
The earning capacity of the company
The dividend‐paying capacity of the company
Whether or not the firm has goodwill or other intangible value
Sales of the stock and size of the block of stock to be valued
The market price of publicly traded stocks or corporations engaged in similar industries or lines of business
Our analysis included, but was not limited to, the previously mentioned factors.
EXERCISE 7 These are the only eight tenets of value in Revenue Ruling 59‐60 that need to be considered.
True
False
EXERCISE 8 Valuation conclusions can be presented as:
A range of values
A single value
An estimate of value
All of the above
1.2.1 Understanding with the Client and Scope of Work
Per AICPA VS Section 100 (SSVS), the valuation analyst should establish an understanding with the client.
The understanding with the client reduces the possibility that either the valuation analyst or the client may misinterpret the needs or expectations of the other party. The understanding should include, at a minimum, the nature, purpose, and objective of the valuation engagement, the client's responsibilities, the valuation analyst's responsibilities, the applicable assumptions and limiting conditions, the type of report to be issued, and the standard of value to be used.10
Furthermore,
a restriction or limitation on the scope of the valuation analyst's work, or the data available for analysis, may be present and known to the valuation analyst at the outset of the valuation engagement or may arise during the course of a valuation engagement. Such a restriction or limitation should be disclosed in the valuation report (paragraphs .52(m), .68(e), and .71(n)).11
We have established an understanding with the client to perform a valuation engagement and have complied with the requirements of AICPA VS Section 100 (SSVS) as stated previously. There were no scope restrictions or limitations on the work or the data available for analysis.
In accordance with the business valuation standards promulgated by the American Society of Appraisers and the Appraisal Foundation (USPAP), we have prepared an appraisal.
The objective of an appraisal is to express an unambiguous opinion as to the value of a business, business ownership interest, or security, which opinion is supported by all procedures that the appraiser deems to be relevant to the valuation.12
It is based on all relevant information available to the appraiser as of the valuation date; the appraiser conducts appropriate procedures to collect and analyze all information expected to be relevant to the valuation, and the appraiser “considers all conceptual approaches deemed to be relevant.”13
In accordance with the Scope of Work Rule in USPAP, we must do the following:
Identify the problem to be solved.
Determine and perform the scope of work necessary to develop credible assignment results.
Disclose the scope of work in the report.
14
To gain an understanding of the operations of Nova, we reviewed Company financial information as provided by management and interviewed Company management. To understand the environment in which Nova operates, we researched the status of and trends in the various industries that have an impact on it. We also studied economic conditions as of the valuation date and their impact on Nova and the industry. To understand the Company's financial condition, we analyzed its financial statements as available.
We considered all three valuation approaches and relevant methods and applied the most appropriate methods from the income, asset, and market approaches to value to derive an opinion of value of the subject equity interest (100 percent controlling, marketable interest). Our conclusion of value reflects these findings, our judgment and knowledge of the marketplace, and our expertise in valuation.
Our valuation is set out in the attached report, which contains the following sections:
History and Nature of the Business
General Economic and Industry Outlook
Book Value and Financial Position
Approaches to Value
Income Approach
Market Approach
Reconciliation of Valuation Methods
Conclusion of Value
Appendixes
Appendix A—Assumptions and Limiting Conditions
Appendix B—Valuation Representation/Certification
Appendix C—Professional Qualifications of the Appraiser
Appendix D—Other Sources Consulted
Appendix E—Exhibits
Appendix F—Additional Information from Mercer Capital's National Economic Review
In performing our work, we were provided with and/or relied on various sources of information, including (but not limited to):
Audited financial statements for Nova for the fiscal years ended December 31, 2017, through December 31, 2021
Internal interim financial statements for Nova for the 11 months ending December 1, 2022, and December 1, 2021
One‐month December financials for all years 2017 to 2021.
Tax returns for the Company for the fiscal years ended December 31, 2017, through 2021.
Information regarding the management and shareholders of Nova
Information regarding the Company's history and current operations
Nova's Articles of Incorporation and Bylaws
Data from the Kroll
Cost of Capital Navigator
Federal Reserve statistical releases
Current and future economic conditions as forecast by various sources, listed in the Appendix
Miscellaneous other information
The procedures employed in valuing the subject interest in Nova included such steps as we considered necessary, including (but not limited to) the following:
An analysis of Nova's financial statements
An analysis of Nova management's future expectations as of late 2022 and other information supplied by management
Discussions with management
An analysis of the fastener industry, as well as the domestic automotive industry
An analysis of the general economic environment as of the valuation date, including investors' equity and debt‐return expectations
An analysis of other pertinent facts and data resulting in our conclusion of value
There were no restrictions or limitations in the scope of our work or data available for analysis.
Based on our analysis as described in this valuation report, and the facts and circumstances as of the valuation date, the estimate of value as of December 1, 2022, of a 100 percent equity interest in Nova Fastener & Tool, Inc. on a control, marketable basis is $33,000,000.
This conclusion is subject to the Statement of Assumptions and Limiting Conditions and to the Valuation Analyst's Representation/Certification found in Appendixes A and B of this report. We have no obligation to update this report or our conclusion of value for information that comes to our attention after the date of this report.
EXERCISE 9 This valuation is being done on a marketable, control interest basis. It is also on a control stand‐alone basis. Name six levels of value that are considered in a valuation.
1._______________________________________________________________
2._______________________________________________________________
3._______________________________________________________________
4._______________________________________________________________
5._______________________________________________________________
6._______________________________________________________________
Distribution of this letter and report and associated results, which are to be distributed only in their entirety, is intended and restricted to you and your client, solely to assist you and your client in the determination of the fair market value of the subject interest for internal operational and tax planning purposes, and is valid only as of December 1, 2022. This letter and accompanying report are not to be used, circulated, quoted, or otherwise referred to in whole or in part for any other purpose, nor to be provided to any other party for any purpose, without our express written consent.
As is usual in appraisal practice, the approaches and methodologies used in our work did not comprise an examination or any attest service in accordance with generally accepted auditing standards (GAAS), the objective of which is an expression of an opinion regarding the fair presentation of financial statements or other financial information, whether historical or prospective, presented in accordance with generally accepted accounting principles (GAAP). We express no opinion and accept no responsibility for the accuracy and completeness of the financial information (audited, reviewed, compiled, internal, prospective, or tax returns), or other data provided to us by others, and we have not verified such information unless specifically stated in this report. We assume that the financial and other information provided to us is accurate and complete, and we have relied upon this information in performing our valuation.
If you have any questions concerning this valuation, please contact Ms. Margaret E. Smith, CPA/ABV/CFF, ASA, CVA, at (800) 000‐1234.
Very truly yours,XYZ Appraisal Associates LLC
1.2.2 Executive Summary
Purpose of Valuation
To assist you in the determination of the fair market value for internal operational and tax planning purposes of a 100 percent equity interest in Nova Fastener & Tool, Inc. as of December 1, 2022
Standard of Value
Fair market value
Premise of Value
Going concern
Conclusion
Based on our analysis as described in this valuation report, and the facts and circumstances as of the valuation date, the estimate of value as of December 1, 2022, of a 100 percent equity interest in Nova Fastener & Tool, Inc. on a control, marketable basis is $33,000,000.
1.3 HISTORY AND NATURE OF BUSINESS15
1.3.1 Overview
Nova Fastener & Tool, Inc. began its history as a manufacturer of brake lining and harness rivets in 1920, under the name Nova Specialty Co. By 1925, the Company built its first rivet‐setting machine and in 1927, incorporated under the laws of the State of Missouri and changed its name to its current form. Nova's influence in the industry continued to grow, and during World War II it received formal recognition from the United States government for its efforts as a vital governmental supplier for fasteners used in aircraft wings and other various munitions of the U.S. military.
By 1964, Nova expanded its operations to manufacturing fasteners, screw parts, and metal assembly equipment. Three years later, A&B Tool Company was acquired by Nova. A&B Tool Company is based in Monroe, Illinois, and manufactures rivets, gears, spring studs, tube nuts, splines, and knurls through cold‐forming technology and precision turning, as well as hand and machine tools. Nova later expanded its manufacture of gears to include other power transmission parts. In 2010 Nova purchased a small manufacturer of metal returnable packaging products, primarily racks and tote bins.
As of the valuation date, Nova operates in three segments: fasteners and parts, tools and assembly equipment, and returnable packaging. The fastener and parts segment consists of the manufacture and sale of rivets, cold‐formed fasteners and parts, screw machine products, gears, and other power transmission parts. The assembly equipment segment consists of the manufacture of automatic rivet‐setting machines, automatic assembly equipment, parts and tools for such machines, and various other hand and machine tools, such as measuring and cutting tools. The returnable packaging segment consists of the manufacture of metal racks and tote bins. Almost all of the revenues for the fiscal year ended December 31, 2021 (over 80 percent of consolidated revenues) was generated by the fasteners segment. The Company is structured as a C corporation for tax reporting.
EXERCISE 10 The subject of this Exercise is a C corporation, but analysts will frequently be required to value noncontrolling interests in S corporations. Valuation of S corporations is one of the most controversial issues in business valuations today. The main issue is how to tax‐affect S corporation income and, if appropriate, compute an S corporation adjustment. What are three models that have been used in valuing S corporations?
1. ___________________________________________
2. ___________________________________________
3. ___________________________________________
1.3.2 Market Area and Customers
The principal market for the Company's products is the North American automotive industry. Sales are solicited by employees of the Company and by independent sales representatives.
Revenues are primarily derived from sales to customers involved, directly or indirectly, in the manufacture of automobiles and automotive components. Although Nova sells primarily to automotive markets, it also sells in smaller quantities to truck, off‐road, aerospace, marine, and rail applications. The level of business activity for the Company is closely related to the overall level of industrial activity in the United States.
Nova serves a variety of customers; however, sales to three major companies accounted for approximately 36 percent (13 percent, 12 percent, and 11 percent) of revenues during 2021. Recently, the Company signed a manufacturing contract with a new customer, which is expected to generate significant revenue growth in the near future.
The Company has no foreign operations. Sales to foreign customers represent approximately 16 percent of the Company's total sales in 2021, and the proportion of sales to foreign customers is expected to grow.
1.3.3 Competition
The fastener, tools and assembly equipment, and returnable packaging markets are characterized by active and significant competition. No single company in particular dominates. The Company's competitors include both larger and smaller manufacturers, and segments or divisions of large, diversified companies with substantial financial resources. The primary competitive factors for the Company's products in the market are price, quality, and service. Based on discussions with management, Nova's primary competitors in various segments include Midwest Fasteners Corp.; National Fastening Systems; Haven Fastener, Inc.; The Eastern Co.; Twin Disc, Inc.; and The L.S. Starrett Co.
The competitive environment has changed considerably in recent years as the Company's customers have experienced intense international competition and pressure to reduce costs. As a result, these customers have expanded their sourcing of components beyond domestic boundaries. Nova's competition now includes suppliers in other parts of the world that enjoy economic advantages, such as lower labor costs, lower healthcare costs, and fewer regulatory burdens. However, the recent COVID pandemic has shown the risks of global supply chains, which management believes may benefit Nova with U.S. customers.
1.3.4 Suppliers
The Company maintains alternative sources for raw materials. The market is served by multiple suppliers, so prices for raw materials are generally competitive. The Company is not under any long‐term contracts for raw materials. Orders are made through purchase orders based on pricing sheets negotiated biannually.
1.3.5 Employees
As of December 2021, the Company had 201 full‐ and part‐time employees. The employees are party to a collective bargaining agreement. The Company is on good terms with the union representing its employees and has recently renegotiated the union contract that now has an X‐year term. There are no employment or noncompete agreements.
1.3.6 Management and Key Persons
As of the valuation date, management and key personnel of Nova include the following individuals, with their titles shown in Exhibit 1.1.
EXHIBIT 1.1 Executive Management
Name
Title
Years with Company
Tony Atkins
Chief Executive Officer
34
Michael Johanson
Chief Operating Officer
16
Kimberly A. Kirhofer
Chief Financial Officer and Treasurer
13
A key person situation exists at the Company in that the business relies heavily on Mr. Atkins, with no formal succession plan in place.
1.3.7 Facilities
The corporate headquarters of Nova is located in St. Louis, Missouri. There is also warehouse space at this location. The Company operates manufacturing facilities in Reading, Ohio, which is used for both fasteners and tools and assembly equipment operations, and in Ames, Iowa, which is also used for the tools and assembly equipment segment, as well as for returnable packaging. Nova also owns the warehouse and manufacturing facility used by A&B Tool Company, Inc. in Monroe, Illinois. The Company also maintains a small sales and engineering office in Boston, Massachusetts, in a leased office. Management indicates that the Company's facilities are adequate but not excessive for its needs. On August 12, 2022, the Company entered into a Purchase and Sale Agreement (the PSA) with Big Arch Properties LLC (the Purchaser) pursuant to which the Company agreed, subject to the terms and conditions of the PSA, to sell its facility in St. Louis, in which the Company headquarters and warehouse space are located, to the Purchaser. On September 27, 2022, the Company's sale of the facility to the Purchaser was completed. The net gain on the transaction was $4,738,394. A portion of the net proceeds was invested in U.S. Treasury bills and included in cash and cash equivalents on the Company's balance sheet.
Concurrently with the completion of the sale of the St. Louis facility, the Company and the Purchaser entered into a lease agreement pursuant to which the Company will lease much of the facility from the Purchaser.
1.3.8 Intangibles
The Company has intangible assets such as relationships with customers, its proprietary trademark, and assembled workforce.
1.3.9 Stock and Stockholders
Nova is a privately held company owned by the same family that founded the Company many years ago. The Company has a single class of common stock with 10,000 shares issued and outstanding. Exhibit 1.2 presents the ownership of the shares of the Company as of the valuation date.
EXHIBIT 1.2 Ownership
Stockholder
Number of Shares
Percentage
Tony Atkins
5,500
55.00%
Louise Atkins
1,500
15.00%
Veronica Atkins
1,500
15.00%
Anthony Atkins
1,500
15.00%
100.00%
EXERCISE 11 We are valuing a 100 percent controlling interest in Nova. The percentage of ownership of individual shareholders is not an issue here. However, assume we are valuing the 55 percent interest of Tony Atkins as opposed to the 100 percent in Nova. The value of a 55 percent interest in Nova would be calculated as 55 percent of the 100 percent control value in Nova.
True
False
No independent valuations or appraisals of Nova have been performed recently. Based on discussions with management, there have been no serious offers or expressions of interest in purchasing the Company, and there have been no transactions in the Company's stock within the past five years. Prior transactions included minority common share gifts from Mr. Atkins to his son, Anthony, and daughters, Louise and Veronica, as detailed previously.
The Company has strong dividend‐paying capacity. However, the Company has generally retained earnings to support capital investment requirements and internal growth, while minimizing debt.
1.3.10 Outlook
In the upcoming year, management plans to continue making significant investments in its equipment and facilities. A modest expansion of the Monroe plant is planned for the fourth quarter of 2023 to increase capacity and improve production efficiency. Investments aimed at supplying parts for electric vehicles (EVs) are also planned. Continuing efforts to foster new customer relationships and build on existing ones in all markets served are also a primary focus.
1.4 GENERAL ECONOMIC AND INDUSTRY OUTLOOK
The financial success of investments in Nova as of the valuation date is dependent on conditions within the economy and financial/capital markets. A prospective investor tempers the use of historical financial statistics on the basis of anticipated general economic conditions. An analysis of these factors as of the valuation date is therefore incorporated into this valuation analysis. Certain items in the following discussion have been extracted from the cited sources and/or substantially paraphrased based on them.
1.4.1 General Economic Overview16
1.4.1.1 TagniFi17
1.4.1.1.1 Summary
In the 3rd quarter of 2022, inflation continued to be the focal point of the U.S. economic picture. The Federal Reserve's hawkish interest rate hikes and quantitative tightening plans have thus far underperformed expectations to temper blazing inflation. Further, volatile energy costs are no longer at the forefront of price increases; while inflation among all items fades slightly, “core” inflation, which sets aside traditionally volatile categories, is accelerating. Meanwhile, elevated interest rates have taken a heavy toll on capital markets and slowed the housing industry's seemingly unstoppable momentum.
The Federal Reserve has repeatedly declared their intent to continue aggressive counterinflationary policies, particularly interest rate raises, despite the constraints such policies are placing on the U.S. economy. In the view of the Fed, the need to contain inflation exceeds the need to keep the economy from the grips of recession.
EXERCISE 12 What types of industries would most likely be affected by anticipated changes in interest rates?
________________________________________
________________________________________
________________________________________
________________________________________
Concerns of recession abated slightly with the first positive real GDP reading of 2022; however, the major factor behind the boosted production numbers, a narrowing trade deficit, is expected to be short‐lived. The labor market continued to be a bright spot in the 3rd quarter of 2022, with the unemployment rate finally reaching its pre‐pandemic level and the labor force participation rate continuing to slowly recover as well.
Recorded COVID‐19 cases waned throughout the 3rd quarter of 2022. With widely available at‐home tests and relaxed testing policies in public and private spaces across the U.S., official COVID case rates likely no longer give an accurate picture of the virus's reach.
Vaccines have been established as a reliable way to limit serious illness and death from COVID‐19; 4.29 million people were newly vaccinated in the U.S. during the 3rd quarter. Additionally, 1.1 million booster doses were distributed, including bivalent vaccines authorized for use as booster doses on August 31, 2022. While speculation continues as to when COVID‐19 will reach an endemic phase in the U.S., a combination of vaccination and prior infection has allowed many aspects of life and commerce to return closer to normal, a situation reflected by increased spending on travel‐related services in the 3rd quarter.
A multifactor indicator of economic strength, the Philadelphia Fed's coincident index18 of economic activity in the U.S. rose 0.4% in September 2022 and 1.0% during the 3rd quarter. For the quarter, coincident indexes increased in 44 states, decreased in 3 states, and were unchanged in 3 states. Coincident indexes reflect unemployment, payroll employment, manufacturing hours, and wages and salaries.
1.4.1.1.2 Q3 Economic Highlights
The Philadelphia Fed's coincident index of economic activity in the U.S. rose 0.4 percent in September 2022 and 1.0 percent during the third quarter.
Real GDP for the third quarter of 2022 grew at an annualized rate of 2.6 percent, following a 0.6 percent decrease in the second quarter of 2022.
The U.S. dollar index rose 5.44 percent during the third quarter of 2022 and 11.3 percent since September 2021.
The effective federal funds rate rose 1.35 percentage points to 2.56 percent during the third quarter, continuing the climb from near‐zero levels in March.
The 1‐year and 2‐year annual Treasury yields ended the third quarter at 4.05 percent and 4.22 percent, respectively. The benchmark 10‐year Treasury yielded 3.83 percent at the end of the quarter, and the 30‐year treasury yielded 3.79 percent.
Unemployment inched down to 3.5 percent during the third quarter of 2022. Nonfarm payrolls grew by 1.1 million jobs in the third quarter.
The Consumer Price Index rose 8.2 percent year‐over‐year in September, down from its 40‐year high of 9.0 percent in June. Excluding volatile energy prices, the annual increase was 7.3 percent.
Crude oil prices ended the quarter at $79.91 per barrel, 25.8 percent lower than one quarter earlier.
New home starts fell to 1.44 million in September, down 8.6 percent for the quarter and 7.7 percent for the year.
The Dow Jones Transportation Average dropped 8.4 percent during the third quarter of 2022, the Dow Jones Composite fell 7.4 percent, and the Dow Jones Industrial decreased 6.7 percent. The S&P 500 was down 5.3 percent.
1.4.1.1.3 Outlook
In June 2022, the Federal Open Market Committee (FOMC) revised its near‐term inflation and unemployment rate projections slightly upward and real GDP projections sharply downward. Adjustments to longer‐run projections for all three indicators were mild yet followed a similar pattern, with inflation and unemployment rising and real GDP declining.
The FOMC revised its projection for real GDP19 to 0.20 percent growth in 2022, rising to 1.00 percent in 2023, then to 1.70 percent by 2024. They expected Personal Consumption Expenditures (PCE) inflation20 to grow to 5.50 percent in 2022 but moderate to 3.05 percent by 2023 and 2.35 percent by 2024. They forecast that the unemployment rate21 would be 3.85 percent in 2022, rising to 4.30 percent in 2023 and 2024. The board again increased projections of future target rates and maintained their resolve to continue tightening monetary policy against blazing inflation despite expected consequences, including a potential recession (see Table 1.1).
TABLE 1.1 FOMC Summary of Economic Projections
Year
Real GDP (%)
PCE (%)
Unemployment (%)
2022
0.20
5.50
3.85
2023
1.00
3.05
4.30
2024
1.70
2.35
4.30
2025
1.80
2.10
4.25
EXERCISE 13 What two economic indicators are probably the most important in valuation?
Unemployment levels and gross domestic product (GDP)
Dow Jones Industrial Average and Producer Price Index
GDP and inflation
Inflation and unemployment levels
EXERCISE 14 In valuing a small geographically concentrated business, which of these types of economic data should be considered?
International, national, regional, local
National, regional, local
Regional, local
Local only
1.4.1.2 Mercer Capital22
1.4.1.2.1 Summary and Outlook
After declining at an annualized rate of 1.6% in the first quarter of 2022 and 0.6% in the second quarter, U.S. GDP increased in the third quarter at an annualized rate of 2.6%. Inflation continued to weigh on economic growth and activity in the third quarter, as the unadjusted CPI increased 0.4% in September 2022 and 8.2% in the twelve months ended September 2022. Core CPI increased 0.6 percent in September 2022 and 6.6% in the twelve months ended September 2022.
The Dow Jones Industrial Average (DJIA), NASDAQ, S&P 500, and broad market Wilshire 5000 all posted quarter‐over‐quarter losses in the third quarter of 2022, compounding U.S. equity markets' dismal performance through the first nine months of 2022. The Dow dropped 6.7% from its second quarter close, while the S&P shed 5.2%, the NASDAQ fell 4.1%, and the Wilshire 500 was down 4.6% in the third quarter of 2022.
