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Risk-Adjusted Damages Calculation in Breach of Contract Disputes: A Case Study

Author

Listed:
  • Graves Frank C.

    (The Brattle Group)

  • Zhou Bin

    (The Brattle Group)

  • Brosterman Melvin

    (Stroock & Stroock & Lavan LLP)

  • Murphy Quinlan

    (Stroock & Stroock & Lavan LLP)

Abstract

Risk-adjusted valuation is well established in both theory and business practice. However, its implications are not always immediately apparent or intuitive in legal disputes such as breach of contract lawsuits. In particular, damages are often calculated by discounting the differences in cash flows between but-for (no breach) and actual (breach) worlds by a single discount rate. While widely used, this approach can produce incorrect valuation results. This paper provides a case study of a breach of an electricity tolling agreement to illustrate the more general valuation principle of discounting but-for and actual cash flows using two discount rates.

Suggested Citation

  • Graves Frank C. & Zhou Bin & Brosterman Melvin & Murphy Quinlan, 2010. "Risk-Adjusted Damages Calculation in Breach of Contract Disputes: A Case Study," Journal of Business Valuation and Economic Loss Analysis, De Gruyter, vol. 5(1), pages 1-22, July.
    • Handle: RePEc:bpj:jbvela:v:5:y:2010:i:1:n:4
    DOI: 10.2202/1932-9156.1092
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    References listed on IDEAS

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    1. Graham, John R. & Harvey, Campbell R., 2001. "The theory and practice of corporate finance: evidence from the field," Journal of Financial Economics, Elsevier, vol. 60(2-3), pages 187-243, May.
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    Keywords

    valuation; risk; cost of capital;
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