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Full-Text Articles in Behavioral Economics
Distinguishing Owner Compensation From Profit In Closely Held Companies: In Search Of A Responsibility Premium, Michael Sack Elmaleh
Distinguishing Owner Compensation From Profit In Closely Held Companies: In Search Of A Responsibility Premium, Michael Sack Elmaleh
Michael Sack Elmaleh
The application of the income method of valuation requires that owner compensation be distinguished from free cash flow. The “proper” parsing of compensation and free cash flow can be the largest point of contention in contested valuation disputes. The preferred method of parsing is the substitution method which says that the proper allocation should be based on the wage that would have to be paid to a non owner employee. In this article I argue that owner employees carry additional responsibilities that are not normally borne by non owner employees. These additional responsibilities require that a premium be paid the …
The Income Method Of Valuation: A False Analogy Between Bonds And Stocks, Michael Sack Elmaleh
The Income Method Of Valuation: A False Analogy Between Bonds And Stocks, Michael Sack Elmaleh
Michael Sack Elmaleh
The discounting of future income streams by a risk adjusted rate of return by proponents of the income method reflects a misplaced faith in the ability to project accurately future income streams and pick out the “right” rate of return. Future income streams are fairly reliably predictable when analyzing a debt instrument. However, equity investment future income streams are notoriously unpredictable. Similarly assessing the risk associated with realizing returns from a fixed security is comparatively easy in comparison with assessing the risks associated with equity returns. The widely used Beta has not proved to be a very stable measure of …