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Damages Calculations Using Before and After-Tax Discount Rates

September 17, 2012

Everett P. Harry contributed an article titled “Future Damages—Before- and After-Tax Discount Rates” for the Fall 2012 edition of the Dunn on Damages—The Economic Damages Report for Litigators and Experts, a quarterly journal available by subscription at http://www.valuationproducts.com/dunn.html.  Mr. Harry’s article is unique and valuable for litigation experts and attorneys by providing an in-depth discussion of an important topic for determining business damages, which is addressed only in summary fashion in now readily-available professional literature.

Mr. Harry acknowledges the commonly accepted preference that projected after-tax cash flow (“ATCF”) should be discounted at the after-tax discount rate (“ATDR”) and, then, grossed-up for business taxes.  Or, in the alternative, the before-tax cash flow can be discounted at the ATDR, which produces the before-tax business damages.

Mr. Harry explores and illustrates the relationships among damages amounts determined by using combinations of the projected before-tax cash flow (“BTCF”) v. ATCF and before-tax discount rate (“BTDR”) v. ATDR, and explains and reconciles any varying outcomes.  For example, Mr. Harry explains and demonstrates that valuation approaches appropriate for determining the present value of a lost stream of future cash flows in perpetuity (i.e., business valuation method) may produce an incorrect damages amount for a discrete damages period.  Likewise, Mr. Harry proves the often-assumed premise that the BTDR is simply the ATDR/(1 – tax rate) is not correct for projected lost future streams of cash flows embodying a periodic growth factor.

 

A complimentary copy of Mr. Harry’s article may be requested by contacting customercare@courtroominsight.com.

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