Preferred Stock and Convertible Debt
Appraisal Economics has extensive experience valuing preferred stocks, convertible debts, and other hybrid securities. We perform our preferred stock and related valuations for a variety of different purposes, including:
- Financial reporting, principally under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) Topic 815, “Derivatives and Hedging”
- Other financial reporting purposes including under ASC Topic 805, “Business Combinations”; ASC Topic 718, “Stock-Based Compensation”; and ASC Topic 350, “Goodwill and Intangible Assets”
- Gift and estate tax valuations
- Internal Revenue Code Section 409A and other tax-related purposes
Appraisal Economics has valued preferred and debt securities ranging from the simplest “plain vanilla” variety to the most complex instruments with multiple conversation, participation, redemption, and other features. These features include a wide variety of “economic rights” (sharing the economic benefits of the issuer) and “control rights” (the ability to dictate or influence the issuer).
A sample of the economic rights we’ve encountered in our valuations include:
- Liquidation preferences
- Various coupon rate structures and preferred dividends
- Unique put and call rights
- Conversion features
- Redemption provisions
- Participation rights
- Registration rights
- Anti-dilution rights
A sample of the control rights we’ve encountered in our valuations include:
- Voting rights, veto rights, and board composition provisions
- Drag-along and tag-along rights
- Right of first refusal
- Management rights
- Information rights
Due to the sophisticated nature of these instruments, we apply a wide range of techniques in our valuations of these instruments, including:
- Closed form models such as Black-Scholes-Merton
- Lattice models, such as a binomial and trinomial models
- Monte Carlo simulations
In recent years, valuations for debt and preferred securities with conversion rights have become particularly prominent. In accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures, it is often necessary to bifurcate the value of such convertible securities into (i) a simple bond component and (ii) the “embedded derivative” (or conversion feature), which can be a call right on another class of equity or a put right that enables the holder to compel the issuer to redeem the security. These valuations typically require multiple binomial lattice models using a “with-and-without” valuation method. The valuation professionals at Appraisal Economics are well versed in the nuances of even the most complex preferred security valuations.
Appraisal Economics can help establish appropriate inputs for the valuation process, such as expected volatility, estimated dividend yield, risk-free interest rates, and risk-adjusted discount rates. Our analysis is fully supported by a detailed narrative report suitable for review by independent auditors, the Securities and Exchange Commission, and the Internal Revenue Service.
We also offer other valuation-related services for preferred stock and convertible debt securities including designing and planning services. Additionally, we offer quarterly updates for preferred and embedded derivative securities, which may be required by accounting regulations.
Appraisal Economics has an experienced team of highly qualified professionals with decades of valuation experience. We provide a full range of valuation services, including purchase price allocations, solvency opinions, portfolio valuations, and business valuations. To learn more about how our team of experts can meet your preferred stock and other valuation needs, please Contact Us.