CHAPTER 16

Company-specific Risk1

INTRODUCTION

Quantifying a company-specific risk premium (C-SRP) is one of the most controversial and elusive areas of business valuation. As Chancellor Strine of the Delaware Court of Chancery stated:

Much more heretical to CAPM, however, the build-up method typically incorporates heavy dollops of what is called “company-specific risk,” the very sort of unsystematic risk that the CAPM believes is not rewarded by the capital markets and should not be considered in calculating a cost of capital. The calculation of a company-specific risk is highly subjective and often is justified as a way of taking into account competitive and other factors that endanger the subject company's ability to achieve its projected cash flows. In other words, it is often a back-door method of reducing estimated cash flows rather than adjusting them directly.

To judges, the company-specific risk premium often seems like the device experts employ to bring their final results ...

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