Damages Calculations Using Before and After-Tax Discount Rates
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 firstname.lastname@example.org.