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This article proposes discounted cash flow (DCF) analysis as a substitute for, or complement to, event studies in securities class actions. In many contexts, DCF analysis would be more consistent with the principles articulated in the Supreme Court's decision in Goldman as well as the academic literature. DCF analysis also could avoid many problems associated with event studies and provide a more intuitive and precise framework for assessing both price impact and merits issues in securities class actions. The central idea is to shift from the analysis of market prices to the analysis of fundamental value. [ABSTRACT FROM AUTHOR]

Unless otherwise stipulated or ordered by the court, this disclosure must be accompanied by a written report- prepared and signed by the witness-if the witness is one retained or specially employed to provide expert testimony in the case or one whose duties as the party's employee regularly involve giving expert testimony. Federal Judge Robert J. Hemphill defined an expert witness as "a man you pay to say your way."[1] When those words were spoken in 1978, the venerable Frye standard, enunciated in 1923,[2] governed the admissibility of expert testimony. The shorthand is (1) qualifications, (2) reliability, and (3) helpfulness.[14] While some overlap exists, courts generally analyze each concept.[15] Whether expert testimony is admissible depends on a court's analysis of these elements. In the final installment, Kumho Tire Company, Ltd. v. Carmichael, [12] the Supreme Court rejected the argument that Daubert applies only to "scientific" testimony; the Daubert test governs all expert witness testimony. [Extracted from the article]

The Loss Period If the plaintiff is able to demonstrate that lost profits are actually available under the contract, it will typically then have to establish the applicable duration for which lost profits are recoverable. [140] Based upon the court's evaluation of the Cajun Joe's brand, it declined to permit the franchisee to collect lost future profits because the brand was a brand new fast-food franchise without a history of losses or profits and, thus, subject to the new business rule. The court further found that, even if the new business rule had not precluded the plaintiff's theory of lost profits, the plaintiff failed to offer sufficient evidence to establish the reasonable degree of certainty necessary to obtain future lost profits. Contractual lost-profits-damages disclaimers are generally enforceable.[147] When constructing a lost-profits disclaimer, it is important to understand that lost profits can be considered as either direct or consequential damages. & Rock Island R.R. Co. v. Ward, 16 Ill. 522, 530-31 (1855) (finding that farmer could recover lost profits where railroad breached covenant to maintain fence); Bridges v. Stickney, 38 Me. 361, 368 (1854) (allowing recovery of direct damages but not consequential damages); Simmons v. Brown, 5 R.I. 299, 302-03 (1858) (relying on Masterton to allow a mill owner to recover lost profits where defendant's damn reduced water flow at the mill); Hoy v. Gronoble, 34 Pa. 9, 10-11 (1859) (enabling sharecropper to recover profits lost when landowner breached oral contract); Hinckley v. Beckwith, 13 Wis. 31, 35 (1860) (holding that the lost profits of sawmill were recoverable). [Extracted from the article]

In disputes relating to valuation where there is reason to doubt the fairness of deal price, the courts prefer the discounted cash flow (DCF) method and the capital asset pricing model (CAPM). Under this approach the standard practice is to calculate value year-by-year for the coming five years (the projection period), to use projected average cash flow to calculate value for the period thereafter (the terminal period), and to sum the two. Because cash flow differs from GAAP earnings primarily by netting out funds reinvested in the firm (plowback), future returns can be expected to grow. Thus, one must adjust for expected growth during the terminal period, which is typically accomplished by reducing the discount rate by the projected inflation rate plus the GDP growth rate, because a firm must keep up with inflation (lest the firm disappear over time) and because economic growth comes from returns generated by business. But if plowback generates return at the same rate ordinarily required of the firm, growth in value will be equal to plowback. Thus, it would be simpler to use projected GAAP earnings as the measure of return for the terminal period without any adjustment to the discount rate. To use cash flow together with an adjusted discount rate is akin to making Maraschino cherries-which are first soaked in lye to remove color and flavor and then soaked in food coloring and sugar to put it back. The question is whether long-term growth in firm value is limited to growth from plowback. There is good reason to think that it is so limited because opportunities to generate above normal returns (economic rents) are likely to dissipate because of competition. Still, it is possible that firms do grow by more than can be explained by plowback. But data are to the contrary. Since 1930, S&P 500 growth can be fully explained by plowback (GAAP earnings less dividends) together with likely reinvestment by investors. Although plowback during this period has been just enough to match inflation, remaining growth in stock prices is slightly less than would be expected by dividend reinvestment, which is consistent with diversion of some portion of dividends to consumption. The data since 2000 are somewhat different in that plowback has been less than inflation, but stock prices have nonetheless increased consistent with reinvestment. The bottom line is that real stock prices seem to grow at a rate slightly more than the real GDP growth rate but a bit less than the plowback rate plus the likely reinvestment rate. It follows that there is no reason for stockholders to expect growth at any greater rate and thus no need for courts to struggle with estimating growth rates: By using projected GAAP earnings as the measure of average long-term return, the courts can use an unadjusted discount rate to calculate terminal value. [ABSTRACT FROM AUTHOR]

The article presents an overview of the concepts of investment liquidity and illiquidity. The difference in price is refereed to as "discount for lack of marketability" (DLOM). It is stated that DLOM measures the difference in the expected price between a liquid asset and an illiquid asset. It discusses the empirical studies and the theoretical models used to estimate the DLOM and the application of the DLOM to a closely held business valuation. It analyzes the factors that influence the magnitude of the DLOM and controversies related to it.

In Estate of Heck v. Commissioner, the Tax Court refused to adopt the Service's application of the market approach as part of a closely held company's valuation where the expert relied on only one comparable company. Instead, the court relied exclusively on the discounted cash flows (DCF) method to arrive at the company's valuation and the resultant deficiency in a decedent-shareholder's estate tax return. The Heck court correctly relied on only the DCF method for calculating Korbel's valuation, but it should have been less dismissive of Spiro's single comparable market approach valuation.