Page 61 - Bankruptcy and Reorganization Services

 Using terminal-period cash flow that is not normalized or does not reflect a full market or busi-
ness cycle.

— Working capital should be at a stable level relative to sales or other operating metrics.
The projected change in working capital should be consistent with the level and growth
rate of revenue and expenses in the residual period.

— Depreciation and capital expenditures should be approximately the same for low levels of
growth.

 The discount rate does not reflect the true riskiness of the project or enterprise (See chapter 11 of
this practice aid).

 Growth assumptions are inconsistent with other model assumptions.

— Growth rates during the projection period are not consistent with projected capital ex-
penditures.

— Growth rates during the projection period are not consistent with projected working capi-
tal needs.

 The terminal year value is discounted at an incorrect number of periods.

 Assumptions imply a different standard or premise of value than defined.

 Failure to add or subtract nonoperating assets or liabilities to or from the value estimate

 Benefits from the tax shields remaining at the end of the projection period are not incorporated.

 Forecasted working capital needs do not capture current insufficient working capital levels.

 Failure to discount utilizing midyear convention.

 Applying the incorrect discount rate to the expected future cash flows estimated, for example, us-
ing a cost of equity to discount cash flows attributable to both debt and equity holders, or apply-
ing a WACC to cash flows attributable to equity holders only.

Asset (Asset-Based) Approach

The asset (asset-based) approach is a valuation approach in which the book value of a company’s assets
and liabilities are restated to an appropriate standard of value (fair market value, fair value, liquidation
value), and the difference between the assets and liabilities results in the value of the company’s equity.
The asset approach is often referred to as the cost approach because the cost to repurchase or rebuild the
assets can be used as an estimate of their value. Widely used methods under the asset approach include
the adjusted book value method and liquidation value method.

After the appropriate standard of value is identified, the appropriate premise of value must be assessed,
which will then establish the foundation for valuing the assets of the company (for a more in-depth dis-
cussion of premise of value see chapter 5, “Premise of Value: Going Concern Versus Liquidation,” of
this practice aid).

© 2020 Association of International Certified Professional Accountants 59