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Common market approach valuation methods include the guideline publicly traded company
(GPTC) method, the guideline merged and acquired company (GMAC) method, and the
backsolve method. . . .

Common income approach business valuation methods include the yield capitalization (or dis-
counted cash flow) method and the direct capitalization method. . . .

The DCF method is commonly used in a solvency analysis because it applies to all three solven-
cy tests. In addition, the debtor cash flow often changes at a non-constant rate during the projec-
tion period.

Finally, in Wolkowitz v. American Research Corp. (In re DAK Industries, Inc.) fn 43 the court relied on
the testimony and opinion of Kenneth A. Bodenstein. Mr. Bodenstein’s opinions were offered in the ap-
plication of the balance sheet test in the context of a preference action. Among other things, the court re-
ported that

Mr. Bodenstein analyzed DAK as a going concern. As of the date of bankruptcy [*124] (or with-
in a few days thereof, May 31, 1992), Bodenstein felt the value of the business was $20 to $25
million, from which one would then subtract the Tokai secured debt. After that adjustment, he
[**19] felt the company’s equity would be worth $2,049,000–$7,049,000 (Ex. B). In arriving at
this conclusion, Mr. Bodenstein compared the DAK statistics to those of publicly traded compa-
nies whose information was available. These other companies, his "comparables," were then ad-
justed to suit his subject, DAK.

It is apparent from the reference to the comparison of DAK statistics to those of publicly traded compa-
nies that Mr. Bodenstein applied the market approach when assessing the fair value of DAK Industries’
assets. Furthermore, exhibit A attached to the reported opinion makes reference to the market multiples
approach being applied by other valuation professionals engaged in this matter.

It may be necessary to adjust a company’s assets due to the need to exclude any assets that the debtor
may have transferred, concealed, or removed with the intent to defraud, hinder, or delay its creditors. As
referenced in the "Asset (Asset-Based) Approach" section, unliquidated, contingent, or disputed assets
and liabilities of the debtor should be evaluated for inclusion in the balance sheet test. fn 44

Determination of Liabilities

In a solvency analysis, the question under consideration is whether the assets of the debtor, at a fair val-
uation, are sufficient to satisfy the valid liabilities, or claims, against those assets. Under this premise, it
would be inappropriate to discount liabilities to their fair market value as a result of the debtor’s finan-
cial distress and the reduced likelihood that the debtor would be able to make debt service payments.
Accordingly, the face value of debt is generally the more relevant measure of debt when determining the

fn 43 In re DAK Industries, Inc., 170 F.3d 1197 (9th Cir. 1999).

fn 44 In this regard, it should be noted that, although GAAP financial statements represent an important starting point, they are not dis-
positive for valuation purposes.

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