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By Shannon P. Pratt

Praise for ''Cost of Capital in Litigation: functions and Examples''

''After revising their present textual content, ''Cost of Capital: purposes and Examples,'' the authors have endeavored to extend their remedy of the topic and extra discover the function of price of capital within the courts. Addressing numerous tools for calculating price and diverse criteria of price, the authors clarify how courts may possibly fluctuate of their judgements in line with the subject, jurisdiction, or on hand proof. This new compilation is a crucial contribution to the sphere of valuation and should function an imminently invaluable source for lawyers and judges. Shannon Pratt and Roger Grabowski have supplied yet one more considerate, priceless, and perfect source for all practitioners drawn to how appraisers and courts have, and will, arrive at value.''? --From the Foreword by way of David Laro, pass judgement on, usa Tax courtroom

''''Cost of Capital in Litigation'' is a truly useful source for litigators confronted with valuation disputes concerning an evaluation of discounted funds flows. within the quarter with which i'm so much familiar--Delaware valuation law--it is thorough and insightful. extra very important to me, its introductory fabric well lays out the conceptual constitution of the valuation factor, and the remainder chapters assemble plenty of information regarding the therapy of the difficulty in components with which i'm much less accepted, (such as financial disaster legislations and household estate litigation).'' --Lawrence A. Hamermesh, Ruby R. Vale Professor of company and company legislations, Widener college institution of legislations, Wilmington, Delaware

''''Cost of Capital in Litigation'' comprehensively offers with a tough topic, stating universal grounds in addition to transformations between specialists within the therapy of this topic. it's a needs to first cease for the uninitiated within the topic and the final word record that each practitioner should still seek advice. quite worthy are the chapters focusing with the eyes of specialists at the therapy of price of capital in particular parts of litigation. particularly, the authors alert the reader to these points of a few of the tools for opting for fee of capital which could differentiate one of the suitability of the equipment in accordance with on hand information, the conditions awarded, and the felony factor below consideration.'' --Reeves Westbrook, Esq., associate and Chair of the Tax workforce, Covington & Burling LLP

''Shannon Pratt and Roger Grabowski have consolidated details on very important theoretical valuation frameworks, sensible purposes, and case legislation wanted via finance pros, legal professionals, and judges in those hard occasions. expense of Capital in Litigation serves as a superior well-written reference on rate of capital and valuation that i like to recommend to either practitioners and students.'' --Theodore Barnhill, Professor of Finance and Director of the worldwide and Entrepreneurial Finance learn Institute, The George Washington college

''Valuation in litigation settings calls for cautious research, reliable facts, and defensible positions. expense of Capital in Litigation info the nuances and refined yet severe components of crafting a defens-ible place for specialists, lawyers, and others who have to know how and why valuation situations are received and lost.'' --Hal Heaton, Professor of Finance, Marriott tuition of administration, Brigham younger collage

''Discount premiums are frequently the most important elements in calculating damages. Even small alterations in those numbers could have huge results at the quantities in dispute--and the significance of damages gained or misplaced. rate of Capital in Litigation explains the underlying financial thought. It then deals separate chapters elaborating on expense of go back methods of their extensively different forensic contexts. this useful compendium even comprises an summary of fee of capital questions to be used by means of lawyers and their monetary specialists. No company litigator might be with no it.'' --Peter V. Baugher, Esq., accomplice, Schopf & Weiss LLP

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This is not correct. In developing an income approach the analyst should determine w hether a multi-period discounted ca sh flow is needed, or w hether the abridged single-year capitalization method w ill suffice. COST OF CAPITAL SHOULD REFLECT THE RISK OF THE INVESTMENT The cost of capital for a ny given investment is a combination of tw o basic factors: A risk-free rate. S. government security. , it includes ex pected inflation). A premium fo r risk. , risk of amount and timing of net cash flow s, and liquidity of the asset).

5. The observed relationship betw een risk and return indicates that the market is relatively efficient over the long term. Assets w ith greater risk are priced to realize greater returns. 5 Capital Market Line—Empirical Estimate Based on Realized Returns by Asset Class 9 The Capital Market Line is different than the Security Market Line (SML). E1C02 09/13/2010 Page 25 Cost of Capital in Litigation: Applications and Examples By Shannon P. Pratt and Roger J. Grabowski Copyright © 2011 by John Wiley & Sons, Inc.

It a lso a ddresses the cost of preferred stock a nd debt, thus concluding w ith a n overa ll cost of ca pita l for the firm, w hich is ca lled the w eig hted averag e co st o f capital (WA CC). 25 E1C02 09/13/2010 Page 26 26 COST OF CAPITAL IN LITIGATION ESTIMATING THE COST OF EQUITY CAPITAL BY THE BUILD-UP METHOD The typical build-up model for estimating the cost of common equity capital consists of tw o primary components, w ith three subcomponents: 1. A risk-free rate 2. 1) E Ri w here: E(R i) Rf RPm RPs RPu Rf RPm RPs RPu ex pected (ma rket required) rate of return on security i rate of return available on a risk-free security as of the valuation date general ex pected equity risk premium (ERP) for the ‘‘market’’ risk premium for smaller size risk premium attributable to the specific company or to the industry (the u stands for unsystematic or company-specific risk) After discussing how to develop ea ch of these four components, w e substitute some risk premium rates into the formula to reach an estimated cost of equity capital for a sample company.

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