Module II· Valuation — Regional NotesAdvanced
Question
How do you apply the professional statutory valuation standard to a middle-market valuation for squeeze-out purposes?
Answer
Statutory-standard valuation in detail:
- Typified investor assumption: a domestic "private investor" subject to a flat withholding tax (~26.375%).
- After-tax CAPM: CoE = Rf × (1 − tp) + β × ERP × (1 − tp_avg).
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Example
Rf 2.5%, tp 0.26375, β 1.1, ERP 5.5% → CoE = 2.5% × 0.736 + 1.1 × 5.5% × 0.736 = 1.84% + 4.45% = 6.30%.
- Terminal-value growth deduction: typically 1–2% (an inflation approximation), lower than in a standard DCF.
- Flow-to-equity (FTE) approach instead of free-cash-flow-to-firm: discount the equity cash flows directly at the CoE.
- Book-value inclusion of non-operating (administrative) assets.
- Observation: the statutory standard typically produces 10–20% lower values than a standard IB DCF because of lower ERP assumptions and tax adjustments. Appraisal-proceedings risk: too low a statutory value → challenge. Market practice: actual squeeze-out prices are often 15–25% above the statutory floor value, to reduce appraisal-proceedings risk.
Pitch tip
"In squeeze-out mandates: the statutory value as a floor, the market price as a ceiling, the final offer in the 60–80th percentile of that range."