G30 - Corporate Finance and Governance: GeneralReturn

This article discusses the main parameters for deriving discount rates at the WACC level using the CAPM in the Czech Republic for company valuation using the income approach. The article first summarizes the observed practice in the Czech Republic, then describes selected parameters of the discount rate, including model examples of various assumptions for the given parameters. Last chapter of the article contains brief reflection on discount rates for valuation of start-ups.

The authors of this discussion paper deal with the small size premium as part of the cost of equity in income approach-based valuations in the practice of Czech Republic. By referencing to empirical professional publications and valuation textbooks the authors demonstrate the existence of a size effect and deal with arguments against the use of the small size premium, which the authors consider to be outdated. The authors also point to the usage of the size premium in Czech and foreign practice. Based on the analysis, the authors recommend including the small size premium in cost of equity estimates.

This article focuses on the analysis of acquisition price distortions in the context of mandatory takeover bids, with particular attention to the decision of the Supreme Court of the Czech Republic (resolution 29 Cdo 293/2017) and the legal framework of the former Commercial Code. The aim is to assess the fairness of the mandatory offer price in relation to market conditions and the market value of the relevant securities. Alternative valuations using valuation models are considered as a supportive tool, relevant only when there are reasons to believe that the market exhibits signs of distortion. The article identifies key factors that may influence the stock price during an acquisition, including market competition structure, investor motivations and characteristics, time pressure, information asymmetry, and other aspects. These factors are then analyzed in terms of their potential to cause distortions in the acquisition price.

This article deals with the method of calculating lost profits, or determining the appropriate basic formula respectively and explaining some concepts that are used in connection with the issue, while at the same time focusing on the issue of loss-making companies. The goal is to summarize the findings regarding the calculations used, to evaluate them and comment on the possibility of their use with regard to the purpose of the economic damage calculation being processed, or the nature of the economic damage case. The need to deal with an appropriate method of calculation results primarily from the fact that different methods and different groups of data are used to calculate economic damages, and the results must often be interpreted primarily from a legal point of view. The connection of the area of quantification of economic damages with a certain legislative framework naturally results from the very subject of economic research, i.e. damages, when this term naturally anticipates that it will be a certain subject of dispute between two parties. In the case of loss-making companies, the conclusion is offered that such a company cannot generate a lost profit. However, just by using the search for a suitable formula, or of the economic framework for quantifying economic damage together with the corresponding jurisprudence, the intention of this article is to find criteria that will determine the category of damage caused.
Within the presented case study. an evaluation of the impact of different perceptions of definitions on the overall calculation of economic damage will be carried out, or lost profit.

This paper deals with the definition of the role of a tax advisor and his duties, the definition of the role of an expert and his duties, with an emphasis on the area of transfer pricing. The article mainly explains their different points of view and the different informational quality of their outputs - transfer-pricing documentation and expert opinions. The article also deals with the role and usefulness of expert opinions in tax proceedings.

This article discusses the topic of intra-group financing and is specifically focusing on the area of intra-group loans from the point of view of transfer pricing. The article introduces the reader to this topic first in general including its placement in legislative and other contexts. Furthermore, the text deals with specifics of financial transactions, their concept in terms of transfer pricing, including the introduction of individual components of transfer pricing analysis in this area. At the end of the article, the conclusions resulting from the comparative analysis of a particular debt transaction are summarized, including recommendations for the Czech taxpayer, which approaches and methods to use for determining transfer prices in connection with intra-group financing.

This article elaborates on motives and determinants of the M&A market and application of valuation techniques in context a standard two-round M&A process, respectively. The author argues that both a seller and a buyer use valuation exercise namely to determine minimum and maximum acceptable price and to support price negotiations. Empirical studies show that an investor usually overpays in situations of: (i) unreasonably inflated expectations on positive synergies, (ii) competitive M&A process / target company actively traded in stock exchange and (iii) lack of planning and qualified human resources both during an acquisition project and a subsequent integration phase.

The paper describes methodological issues related to the construction of the required rate of return (WACC) for the purpose of valuation business unit using DCF entity and DCF equity methods. There is a discrepancy between the approaches of valuation practice in constructing the required rate of return on equity using the SML model using the stock market index as the so-called market portfolio versus using the market portfolio based on the theoretical CAPM model. Furthermore, the issue of identifying the cost of equity of floating rate foreign funds. The paper draws attention to the fact that DCF valuation methods are by their nature highly subjective valuation procedures, among other things due to the construction of discount factors (required rate of return) when valuing a business unit using DCF-based valuation procedures.

In this empirical study planning and estimation of continuing value in business valuation were analyzed. I have organized an empirical research based on questionnaires. Experts from universities, from valuation institutes and independent experts were interviewed. Research was realized in 2022, as well as in 2008. In 2008 145 respondents were interviewed, 65 of them have answered, in 2022 229 were interviewed and 96 have answered. There were 5 questions dealing with business valuation method, the length of the first stage, data, based on which experts plan the first stage, method of estimation of continuing value and estimation of long-term rate of growth of companies as one parameter of continuing value. In this article are analyzed answers of each of three expert groups separately and in comparison with 2008. Further comments of respondents are added.

The importance of accuracy in appraisal prices is emphasized in both Czech and foreign literature. We have compared the purchase prices (price data of the State Administration of Land Surveying and Cadastre ) and appraisal prices (of Česká spořitelna, a.s.) of flats. The pairing of flats was done primarily on the basis of geographic location (using GPS coordinates), then by flat area, type of construction and date of the record / estimate. As a result, it was found that for 60% of the flats the appraisal prices were higher than the purchase prices. The discrepancy between the purchase and appraisal prices was mainly for flats in brick buildings and rather smaller flats. However, these results should be taken with caution in view of the limitations of the data sources used.

This article looks at EBITDA as one of the key indicators in corporate finance and focuses on the differences in the methods of calculating EBITDA by different user groups. First, it is defined by financial theory and described from the perspective of Czech and especially international financial reporting standards (IFRS). Furthermore, the method of EBITDA calculation is shown from the point of view of banks and leasing companies, European and state funds, companies, investors, M&A advisors and experts. Subsequently, an empirical study is performed on Czech companies, which analyzes the impact of various methods of calculating this indicator on its amount.

This article analyses selected factors affecting EBITDA margins with focus on effects of: (i) outsourcing, (ii) rentals and leases utilization, (iii) specific accounting policies, (iv) transactions with related parties. Further, the author warns against "blind" application of the uniform sectorial EV / EBITDA multiple on each company fulfilling the same service provided / customer base criteria. A valuation expert attempting the market approach shall maximally double-check consistency between the valued company and its sectorial "peers" in: a) accounting policies affecting P&L and EBITDA calculation formula, b) application of the same fiscal year basis in the multiple's computation, c) growth potential, risk profile and investment requirements of each of the companies in question.

This article describes approaches and methods related to venture capital valuation namely, start-up valuation. New venture value concepts have emerged within venture transactions. The pre-money valuation shows the value of the start-up before new capital infusion, while the post-money valuation shows the value of the start-up including a new capital infusion. Approaches of venture capital valuation (VCV) are, in principle, coincident with approaches of public equity valuation. Four approaches of VCV can predict the start-up value in two directions of future expected earnings, the first direction - post-money value including a new capital infusion and the second direction - pre-money value excluding capital investment/infusion. In the extreme scenario where a start-up without capital infusion ceases to exist because there are no venture capital providers, the expected profit will be zero, which means zero pre-money valuation. Ultimately, it is very difficult to determine whether the start-up value is before or after the new capital infusion and, thus, the start-up valuation becomes a matter of negotiation process between the founder and the venture investor as it depends on a new capital infusion, to what extent, it affects the enterprise value of a start-up or it has an impact on its future exit.

This article systematically organized the fragmented literature into a comprehensive overview and provides compact information on qualitative criteria aimed at the future success of an IT start-up at an early stage phase. The capital infusion in the form of substantial VC investment is a gauge of success. The qualitative criteria may be considered by valuers or analysts when drawing up a financial plan (investment model). Three directions of research on start-up valuation emerged from the literature overview. Current valuation practice has sophisticated methods of public equity valuation, which mature companies are, while private equity valuation is cloaked in mystery and black magic. The first direction develops and deepens methods of public equity valuation. The second and third directions develop the field of private equity valuation (i.e., VC investments) and look for a link between the acquisition of a substantial VC investment and the factors themselves that lead to the acquisition of the VC investment. The second direction defines obtaining a VC investment as a success criterion, while the third direction analyses the individual factors present in successful start-ups.

The article analyzes the relationship between working capital, as one of the value drivers, and the value of the company. It focuses on the synthesis of the conclusions of empirical studies of the relationship between working capital and various corporate indicators, such as profit, profitability, but also, for example, corporate indebtedness. The subject of research is also the relationship between working capital and industry and working capital and the size of the company. The relationship between the volume of working capital and the need for investment (existence of investment opportunities) also proves to be significant. The results of domestic and foreign studies from recent years are synthesized. The article can serve financial managers for a more comprehensive understanding of the management of working capital - ie how it impacts the growth and performance of the company. However, it is also intended for valuation professionals for the purpose of preparing the business plan for the DCF method.

This article is focused on Embedded Value and Appraisal Value, which are used in the insurance industry as a key indicator of the performance of life insurance companies. In addition to the methodology of their calculation it is shown how these methods are used in practice of insurance industry and how they can be used by appraisers.

This article describes the best-known theories related to the capital structure topic. Since the publication of the Modigliani and Miller's (1958), the theory of capital structure of firms has been a study of interest to finance economists. In the paper, we will describe three main theories of capital structure, which diverge from the assumption of perfect capital markets under which the MM model is working. The first is the Trade off theory. The trade-off theory is the trading-off the benefits of the firm with cost of debt and equity. It means that companies try to find "optimal" capital structure to have a best combination of debt and equity. The second is the pecking order theory, which states that the company follows a hierarchy of financing (internal financing, debts and, last but not least, the issue of securities) in order to minimize problems with information asymmetries between managers and shareholders. In 2002, Baker and Wurgler came up with a new theory of capital structure: "Market Timing Theory." This theory states that existing capital structure is the cumulative result of the firm's past experience, which it had attempted time to time under equity market.

The paper uses practical examples to show how courts handle and consider information after date of valuation in their decision-making. Courts use such information to review and evaluate expert opinion. Courts also believe that experts should not take such information into consideration.

This article deals with the issue of using information after the valuation date in an expert valuation and responds to the article "Working with valuation date and available information" published in Valuation Journal No. 2/2018. As a general rule, an expert may not use specific findings of fact known after the valuation date. The issue of the use of information after the valuation date is largely a legal issue, which is closer to lawyers than valuation experts, so the legal issues are explained here first. This article identifies several types of cases where "information" known after the valuation date can be used, sometimes more than 10 years after the valuation date. We do not think this list is complete.

The presented paper aims to point at the broader context of valuation using the methods of risk-adjusted discount rates (RADR) and certainty equivalents (CE), respectively, when dealing with negative risk cash flows. The article discusses different concepts of risk and uncertainty, presents an overview of the research (literature) on risk adjustment and discounting methods applicable on future uncertain cash flows published over the past 50+ years, and also addresses how the methods of certainty equivalents and risk-adjusted discount rates interlink and relate to the concept of utility function. The article concludes with a call for caution and critical view when the universally adopted RADR method is applied in valuation of negative risk cash flows (expenditures).

This article deals with the issue of expert valuation in squeeze-out or crowding out. The valuation in the squeeze-out process has its peculiarities, which are not known to the experts and sometimes to the lawyers. This results in disproportionately long court proceedings. In the article I first mention the definition of the squeeze-out itself and its meaning. Next, I deal with the case-law that has been issued on this issue, the basis (category) of the value that should be established and the premium that reduce valuation. The article shows the approach of the Supreme Court and Constitutional Court of the Czech Republic, which recently issued a resolution summarizing the existing case law on the interpretation of the adequacy of the consideration in the so-called squeeze out.

This article is devoted to the issue of valuation of the company's technical base and its use for comprehensive income valuation. This article further describes in detail the quantification of the tangible assets from the point of view of the corresponding value base, with an emphasis on the company's income valuation. Part II of this article will be devoted to the valuation of intangible fixed assets and the significance of the "spread" indicator.

Valuation for marital dissolution purposes is specific in several ways and therefore the professional practice is not unified in the methodology and approaches. One of the fields where you can encounter inhomogenity is inclusion of leased property in the business valuation of a company that is owned by one spouse when the company's valuation was based on the asset approach. The paper analyses the Czech practice of the courts in this field and applies the findings in a case study.

The goal of the article is to examine how valuation reports published in the Czech commercial register meet the fundamental and the standard requirements for business valuation. The research is based on predetermined evaluation criteria, and it is performed on a sample of 184 valuation reports published in the commercial register during the year 2017. The fundamental requirements are defined by the basis of value and the value drivers. Without these, the valuation would have a very limited explanatory power. The standard requirements follow the principles defined by generally accepted valuation principles. The research showed that the fulfillment of fundamental requirements is generally significantly better than the fulfillment of standard requirements. Despite that, we have identified several essential malpractices we consider to be alarming. Thus, we consider the general quality of the valuations to be inadequate.

This paper deals with the topic of work with available information in relation to the valuation date. Firstly, this paper presents the main methodology included in the International valuation standards and in the draft of the standard S1 OP VŠE "Standard for business valuation in the Czech Republic" drawn up by the Institute of business valuation. Secondly, this paper proposes the approach of working with information originated before the valuation date but published thereafter. Also, this paper deals with the role of the expert in the elimination of information asymmetry. Finally, this paper examines what methodology to use if it progresses between the valuation date and the date of the expert opinion.

The article deals with the use of appropriate basis of value, especially for squeeze-out purposes. Recently, an equitable value base has emerged. The first part of the paper presents a summary of the ZNAL and OCE methodology, focusing on choosing the right base of value for squeeze-out purposes. According to the authors, such a base is the market value. For the squeeze-out purposes, the economic logic is not to eliminate the size premium and the lower liquidity premium when estimating a discount rate. Finally the article is dedicated to the first discussion of the possible use of an equitable value base. Approach to an equitable value base is not unambiguously closed in the Czech theory and practice. Yet, in practice, this base of value is misused. There is no clear procedure for estimating the equitable value and, in particular, it is not possible for the economic specialist to decide what is just. Justice should be decided by court.

This article presents a concept of the assets and liabilities allocation between the corporate finance aggregates: Net working capital and Net debt, respectively. A correct quantification and application of both aggregates is a prerequisite for a valid corporate valuation. The author argues that, namely from the market multiple based valuations perspective, all assets and liabilities having their double entry as revenues (income) and costs affecting adjusted EBITDA shall be treated as Net working capital. All other items not related to adjusted EBITDA including assets and liabilities related to investment activity, financing / dividend pay-outs shall be treated as Net debt. However, there might be non-classified items such as provisions or deferred tax balances non-compliant with the liability definition or already correctly included in a DCF valuation model. In case of significant off-balance sheet liabilities, the author suggests their valuation shall be attempted and value included in Net debt.

The article proposes a set of evaluation criteria for business valuation reports, focused mostly on income oriented approaches to valuation. The potential of its application can be anticipated primarily in a cross-sectional analysis of the quality of submitted and published business valuation reports in the Czech Republic. Alternatively, these criteria can be utilized when performing valuation revisions, or by public institutions for various supervision purposes. The proposed set of criteria is dealing not just with an assessment of the technical aspects of the valuation, but it also monitors the fulfillment of general principles expert witnesses' reports ought to follow. All this is presented in a form tailored for the specific discipline of business valuation. Since the article is a basis for a pilot research assessing the overall quality of business reports, the emphasis is put on the monitoring function in order to learn as much as possible about methods and practices used by expert witnesses in the domestic conditions. The proposal is designed rather practically, while it guides the evaluator through the entire standardized process of business valuation and allows him to track the levels of fulfillment in every single part of the report.