Page 50 - Economic Damage Calculations

Glossary

actual/impaired scenario. The cash flow or income stream, as part of a lost profits or other damag-
es analysis, representing the experienced or future expected results given that the damages
event(s) occurred.

after-tax discount rate. The discount rate, net of taxes on income or growth, to be applied in dis-
counting.

asymmetry of information. A situation in which two parties, typically as part of a transaction, are
operating with different information pertaining to the subject transaction.

beta. A measure of systematic risk of a stock; the tendency of a stock’s price to correlate with
changes in a specific index. fn 1

breach of contract. Failure, without legal excuse, to perform any promise which forms the whole or
part of a contract. Prevention or hindrance by party to contract of any occurrence or performance
requisite under the contract for the creation or continuance of a right in favor of the other party or
the discharge of a duty by him or her. Unequivocal, distinct, and absolute refusal to perform an
agreement. fn 2

build-up model. A model used to estimate the cost of equity capital that includes

a. A risk-free rate of return,

b. The general market equity risk premium,

c. A risk premium related to size,

d. A risk premium related to industry-specific factors, and

e. A risk premium related to unsystematic company-specific factors.

but for scenario. As part of a lost profits model, this represents the expected outcome were the
damages event not to have transpired.

capital asset pricing model (CAPM). A model in which the cost of capital for any stock or portfo-
lio of stocks equals a risk-free rate plus a risk premium that is proportionate to the systematic
risk of the stock or portfolio.

capital markets approach (the "traditional approach"). A method of estimating a discount rate
and discounting a stream of income (or lost income) in a damages calculation. The capital mar-

fn 1 Statement on Standards for Valuation Services (SSVS) No. 1, Valuation of a Business, Business Ownership Interest, Security, or
Intangible Asset (VS sec. 100).

All VS sections can be found in AICPA Professional Standards.

fn 2 Black's Law Dictionary, 9th ed., ed. Bryan A. Garner (West Group, 2009).

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