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Our philosophy of business valuation is based on the
teaching of the revered late Professor Merton Miller received by Dr. Kamin in
his studies of financial theory at the University of Chicago Graduate School
of Business. Professor Miller shared
the 1990 Nobel Prize in economics for his pioneering work in the economic
theory of valuation and corporate finance. Professor Miller’s teaching has imbued the entire field
of business valuation for both public and private companies. His teaching led to the phrase “free cash
flow” to describe the source of the economic benefit to shareholders that is
the basis for attribution of value to share ownership. Free cash flow is the cash withdrawable
from a business after allowing for capital needed for reinvestment to support
the firm’s growth opportunities. Professor Miller’s premise is that the only
economically rational basis for valuing a business enterprise is the
aggregate current value of all future free cash flows distributable by the
firm. Each future year’s cash flow has
a present price per dollar that reflects the time-value of money and the
compensation for risk bearing to the future date. The economically rational value of the
business firm is then the price per dollar of each year’s future free cash
flow multiplied by the number of dollars of future free cash flow summed up
over all the future years in which free cash flow is expected to be
generated. The methodology for valuing corporate securities
follows from Professor Miller’s valuation theory for measuring total
enterprise value. Fixed-income
securities are valued by discounting to present value the stream of promised
interest payments and face value using discount rates that are consistent
with their risk ratings. The value of
equity then equals the total enterprise value less the value of the
fixed-income securities. Hybrid
securities, such as convertibles, are valued based on appropriate
combinations of conventional securities that are economically equivalent. We apply these principles as follows: · Business Valuation—Appraise value of closely held businesses and
equity/debt components of capital structure, conforming to Uniform Standards
of Professional Appraisal Practice (USPAP).
Purposes include income, estate and gift tax, buy-sell agreements,
ESOPs and acquisitions/divestitures. · Intellectual Property—Conduct valuations of patents, trademarks and
copyrights, accounting for market potential, competition, development costs,
product life cycle and duration of protection. Utilize cost, income and market approaches. · Fairness Opinions—Evaluate fairness of terms of transactions to
interested parties. Consider criterion
of fair market value as affected by minority and liquidity discounts. · Feasibility Studies—Examine and analyze factors affecting return on
investment to real-estate and industrial projects. |
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Professor Miller shared the 1990 Nobel Prize in
economics for his pioneering work in the economic theory of valuation and
corporate finance. |
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