CVA flashcards
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32 cards. Read the term and the definition here. The deck at the top of this page is optional.
- Gordon growth model
- A perpetuity growth formula: value = next period cash flow divided by (discount rate minus growth rate). Requires growth rate less than discount rate.
- WACC
- Weighted average cost of capital: proportional cost of equity plus after-tax cost of debt, using market value weights. Used as discount rate for enterprise cash flows.
- CAPM
- Capital Asset Pricing Model: expected return = risk-free rate + beta times market risk premium. May add size and company-specific premiums.
- Normalization adjustments
- Adjustments to financial statements to reflect economic reality: remove non-recurring items, adjust owner compensation to market, eliminate personal expenses.
- Control premium
- An additional value paid for a controlling interest, reflecting ability to direct operations and cash flows. Often derived from acquisition data.
- Marketability discount
- A reduction in value for lack of ready market for an ownership interest, often applied to closely held company shares.
- Terminal value
- The value of all cash flows beyond the explicit forecast period, calculated using Gordon growth or exit multiple.
- But-for scenario
- In litigation, the hypothetical economic state that would have existed absent the wrongful act. Used to calculate lost profits.
- Lost profits
- Difference between profits that would have been earned but for the defendant's action and actual profits, discounted to present value.
- Mitigation of damages
- Plaintiff's duty to take reasonable steps to reduce losses; failure may reduce recoverable damages.
- Prejudgment interest
- Interest awarded from date of loss to date of judgment to compensate for time value of money. May be simple or compound per statute.
- Business interruption loss
- Lost net income plus continuing expenses minus saved expenses during period of restoration after a covered event.
- Fair value vs fair market value
- Fair value is a legal standard often excluding minority and marketability discounts; fair market value is a hypothetical transaction price between willing parties.
- Daubert standard
- Federal rule for admissibility of expert testimony: requires reliability, relevance, testability, peer review, and known error rate.
- Forensic economics
- Application of economic analysis and data to legal disputes, including damage quantification, valuation, and industry analysis.
- Fraud triangle
- Three conditions present in fraud: pressure or incentive, opportunity, and rationalization. Used to assess fraud risk.
- Benford's Law
- In many natural data sets, leading digit 1 occurs about 30.1% of the time. Significant deviations may suggest manipulation.
- Net worth method
- Forensic technique: increase in net worth plus personal expenditures minus non-taxable income equals unreported income.
- Bank deposits method
- Forensic technique: total bank deposits minus non-income deposits and transfers equals potentially unreported income.
- Chain of custody
- Documentation of who handled evidence, when, and how, to ensure integrity and admissibility in legal proceedings.
- Asset misappropriation
- Fraud involving theft or misuse of company assets, such as skimming, larceny, check tampering, or expense reimbursement fraud.
- Financial statement fraud
- Intentional misstatement or omission in financial reports, often involving revenue recognition, asset valuation, or disclosure.
- Rule 26 report
- Expert witness disclosure under Federal Rules: must include opinions, basis, facts considered, exhibits, qualifications, and compensation.
- Relevered beta
- Adjusting a peer group's beta for the target company's capital structure using the Hamada formula: βL = βU × [1 + (1−t)×D/E].
- Purchase price allocation
- Allocating acquisition consideration to acquired tangible and intangible assets at fair value, with residual to goodwill.
- Impairment testing
- Comparing carrying amount of an asset to its recoverable amount; if carrying exceeds recoverable, recognize impairment loss.
- Fairness opinion
- A financial advisor's assessment of whether transaction consideration is fair from a financial point of view, often using multiple methods.
- Synergy valuation
- Present value of incremental cash flows from cost savings and revenue enhancements minus integration costs in a merger.
- Consulting expert vs testifying expert
- Consulting expert advises counsel and is not disclosed; testifying expert provides opinions and is subject to discovery and cross-examination.
- Black-Scholes model
- Option pricing model used to value employee stock options, incorporating stock price, strike, volatility, time, and risk-free rate.
- Market approach
- Valuation method using prices of comparable assets or businesses, adjusted for differences, to derive value.
- Income approach
- Valuation method converting expected future cash flows or earnings to present value using a discount or capitalization rate.