CVA cheat sheet

Income approach: value = PV of expected future cash flows discounted at a rate reflecting risk; Gordon growth model: value = CF₁ / (r − g), requires r > g.

Market approach: use comparable company transactions or guideline public companies; apply pricing multiples (EV/EBITDA, P/E, EV/Sales) adjusted for size, growth, and risk differences.

Asset-based approach: value = fair market value of assets − liabilities; appropriate for holding companies or when earnings are not representative.

Capitalization of earnings: value = normalized earnings / capitalization rate; cap rate = discount rate − long-term growth rate.

Weighted average cost of capital (WACC) = (E/V)×Rₑ + (D/V)×R_d×(1−t); use market values for weights.

Cost of equity via CAPM: Rₑ = R_f + β×(R_m − R_f) + size premium + company-specific risk premium (if applicable).

Normalization adjustments: remove non-recurring items, adjust owner compensation to market, eliminate personal expenses, and reflect related-party transactions at arm's length.

Minority vs. control: control premium increases value; lack of control (minority) discount decreases value; marketability discount applies to non-marketable interests.

Terminal value in DCF: use Gordon growth or exit multiple; ensure terminal growth ≤ long-term GDP growth and consistent with discount rate.

Damages in litigation: but-for scenario vs. actual scenario; lost profits = but-for profits − actual profits, discounted to present value.

Economic loss calculation must exclude avoided costs and mitigate damages; plaintiff has duty to mitigate.

Prejudgment interest: simple vs. compound; statutory rate or prime rate; calculated from date of loss to judgment date.

Business interruption loss: lost net income plus continuing expenses minus saved expenses; period of restoration defined by physical damage repair time.

Valuation disputes: fair value vs. fair market value; fair value often excludes minority/marketability discounts in dissenting shareholder actions (jurisdiction-dependent).

Lost earnings for individuals: present value of after-tax earnings capacity, net of personal consumption, reduced by mitigation and adjusted for work-life expectancy.

Forensic economics: use of reliable data, regression analysis, and industry benchmarks; expert must explain assumptions and methodology under Daubert/Frye standards.

Punitive damages: not typically included in economic loss; require separate finding of egregious conduct.

Tax effects: damage awards may be taxable or non-taxable; economic loss should be calculated on an after-tax basis unless statute specifies otherwise.

Fraud triangle: pressure/incentive, opportunity, rationalization; used to assess fraud risk.

Benford's Law: in naturally occurring data sets, leading digit 1 appears ~30.1% of the time; deviations may indicate manipulation.

Net worth method: increase in net worth + personal expenditures − non-taxable income = unreported income (used in tax fraud).

Bank deposits method: total deposits − non-income deposits − transfers = potentially unreported income.

Source and application of funds: trace cash inflows and outflows to identify unexplained funds.

Computer forensics: preserve metadata, maintain chain of custody, use write-blockers; hash values verify integrity.

Financial statement fraud red flags: aggressive revenue recognition, unusual related-party transactions, frequent changes in auditors or accounting policies.

Asset misappropriation: skimming, larceny, check tampering, expense reimbursement fraud; detect via surprise audits, segregation of duties, and data analytics.

Expert report must comply with Rule 26: state opinions, basis, facts/data considered, exhibits, qualifications, and compensation.

Cost of capital in consulting: estimate discount rate using peer group betas, relever for target capital structure; use size premium from Duff & Phelps (now Kroll) data.

Business plan review: test assumptions for reasonableness, consistency with historical performance, and market evidence.

M&A synergy valuation: value synergies = PV of incremental cash flows from cost savings and revenue enhancements, minus integration costs.

Purchase price allocation: allocate consideration to tangible and intangible assets at fair value; residual to goodwill.

Impairment testing: compare carrying amount to recoverable amount (higher of fair value less costs to sell and value in use); recognize impairment loss.

Litigation support vs. expert witness: consultant advises and is not disclosed; expert testifies and must be independent.

Fairness opinion: evaluates whether consideration in a transaction is fair from a financial point of view; typically uses multiple valuation methods.

Valuation of employee stock options: use Black-Scholes or binomial models; consider vesting, forfeiture, and marketability restrictions.