The backgrounds of the webpages are based on actual assignments, research and other thoughts. Read on if you want to know a little more. -- Andy
Consulting Services and Litigation Experience Page Background Formulae
This was an interesting project related to determining whether certain payments were substantially certain to be made regardless of a change in control under Q/A-22 of the IRC §280G regulations.
The client was in the process of a change in control that lasted a couple of years. There were multiple offers to purchase the company and stock analysts stopped following the company while it was in play.
A parachute analysis was conducted by an accounting firm assuming that the stock price increase that occurred during the long time period the client was selling itself was entirely due to the deal. This caused a number of relative TSR awards to be considered potential parachute payments which triggered excise tax consequences for the CEO. Management, however, believed that some portion of the stock price increase was attributable to the company's performance and accordingly, some portion of payments from outstanding relative TSR awards was substantially certain to be made even if there was no change in control.
To determine what the stock price might have been based on the client's performance, I developed a discounted cash flow (DCF) model and a discounted Economic Value Added (EVA) model. Using both models (which should produce the same present value) and a stock price prior to any announcements, I backed into the assumed growth in Return on Invested Capital (ROIC) and growth in Net Operating Profit After-Tax (NOPAT). I then held those assumptions constant to determine what the stock price might have been based on updated company financial data. Probabilities of payments from outstanding relative TSR awards were then determined using the stock price developed using the DCF and discounted EVA models and the N(d2) term from the Black-Scholes model (using a risk-adjusted rate instead of a risk-free rate).
Based on this analysis, the tax advisors signed off on certain relative TSR payments being substantially certain regardless of the change on control, making these payment fall out of the IRC §§280G and 4999 analysis and eliminating the excise tax issues for the CEO.
