Equilibrio Capital | Brasil -- Valuation services: Focused on difficult-to-value, non-traded assets and liabilities

1. Valuation services
Valuation services
Focused on difficult-to-value, non-traded assets and liabilities
10 August 2012
© 2011-2012 Equilibrio Capital | Brasil 1

2. Valuation services
Scope of valuation services
Financial reporting valuation services—
:: Asset-liability valuations in connection with acquisition price allocations under IFRS, BR and US GAAP
:: Intangible asset and goodwill impairment testing and measurement under IFRS, BR and US GAAP
:: Deferred tax asset measurement under IFRS, BR and US GAAP
:: Financial forecasting model development for use in financial reporting valuations
:: Valuation training for accountants and auditors on valuation methods and related accounting controls
Transaction advisory-related valuation services—
:: Econometric analysis, financial modeling and valuations for merger and acquisition negotiations
:: Valuation-related due diligence for merger and acquisition transactions
:: Valuation reporting and fairness opinions for merger and acquisition transactions
 All valuation services are based on modern asset pricing theory and in accord with applicable professional standards. 
© 2011-2012 Equilibrio Capital | Brasil 2

3. Valuation services
The fundamental problem of non-traded asset valuation
The value of any asset, liability or equity depends on associated future cash flows discounted at some return:
CFt 1 CF CF
Vt   t22  ...  TT .
R1 R R
Accounting standards generally require fair market value (FMV) measurements, where expected future cash
flows must generally be discounted at a market risk-adjusted return, R*:
CFt 1 CF CF
FMVt   t2  ...  T .
R1 R2 RT
Summers (1986) shows that—even for traded assets—market expected risk-adjusted returns (R*) cannot be
estimated with any reasonable degree of reliability. When estimating FMV of non-traded assets (including
intangible assets and goodwill), the problem is more severe because such assets are by nature unique and, so,
have no similar assets traded in active markets. This is not adequate for financial reporting purposes where
accounting measurement estimates must be supported relevant, reliable evidence. It follows that …
The fundamental problem of non-traded asset valuation: There is no reliable way to estimate fair
market-derived, risk-adjusted rates of return for non-traded assets and liabilities (including intangible
assets) for use in estimating their fair market values using discounted cash flow methods. 
© 2011-2012 Equilibrio Capital | Brasil 3

4. Valuation services
Equilíbrio Capital valuation approach
Equilíbrio Capital solves the fundamental problem of non-traded asset valuation by combining two seminal
results of modern asset pricing theory:
Arbitrage pricing theory ............................ market returns and market prices are a linear
Expected
function of systematic market risk factors; non-systematic,
idiosyncratic risks are not priced by markets in equilibrium
(Ross 1976, 1978).
Risk-neutral pricing theory .........................
Risk-neutral probabilities, certainty-equivalent risk factors,
and pure state prices can be recovered from observable
market data, which can used to transform expected cash
flow information to market-certainty-equivalent values (cf.
Ingersoll 1987 and Black 1988).
Specifically, Equilíbrio Capital uses modern asset pricing theory and econometric methods to (i) identify,
estimate, and test priced market risk factors, (ii) derive market-certainty-equivalent risk factors values, (iii)
estimate and test sensitivity of revenues, costs, and cash flows to market-priced risk factors, and (iv) and derive
market-certainty-equivalent risk factors values. 
© 2011-2012 Equilibrio Capital | Brasil 4

5. Valuation services
Asset pricing theory: The concept of certainty-equivalent valuation
FMV0 (CF1ce ) FMV0 (CF1 )
CF1ce / ( 1  rf ) CF1 / ( 1  r  )  CE valuation uses only observable factors. 
observable unobservable
market market
risk-free risk-adjusted
discount discount
factor factor
© 2011-2012 Equilibrio Capital | Brasil 5

6. Valuation services
Asset pricing theory: Estimating certainty-equivalent risk factor values
 Econometric methods allow derivation of market-priced, certainty-equivalent risk factor values. 
© 2011-2012 Equilibrio Capital | Brasil 6

7. Valuation services
Asset pricing theory: FMV conditional on certainty-equivalent risk factor values
CF1ce(x*) CF2ce(x*) CFTce(x*)
 FMV estimates depend on observable factors: FMV0 (x*)  1
 2
 ...  
Rf 1 Rf 2 RT fT
FMV is a function of certainty-equivalent future cash flows
and observable market risk-free interest rates
© 2011-2012 Equilibrio Capital | Brasil 7

8. Valuation services
Intangible asset valuation: Economic theory
In general, the value of intangible assets cannot be separated from that of other production inputs:
naturalresources
intellectual property,
humanresources  technology, and other 
 products 
 profits
intangible assets
capitalresources
production and revenues are non-linear functions of revenues and profits depend jointly
resource inputs combined with intellectual property on resource, technology, and
technology and other intangible inputs intangible asset inputs
Recognizing such non-linearities in production, revenue, profit, and cash flow functions, value of intangible
assets (IA) must be expressed as discounted future marginal cash flows attributable to the intangible asset:
  CF1ce(x )  1  CF2ce(x )  2  CFTce(x )  T
FMV0 (IA; x )    Rf 1    R f 2  ...    R fT .
 IA   IA   IA 
© 2011-2012 Equilibrio Capital | Brasil 8

9. Valuation services
Intangible asset valuation: Economic theory and econometric analysis
As a simple example, consider marginal effects of a trademark (TM) on profits and cash flows, which can be
assumed—to simplify exposition—to be equivalent to the marginal effects of the trademark on revenues.
Marketing theory suggests demand for a product is a function of product price, quality, advertising, etc. If the
trademark has value, it has a measurable marginal effect on revenues in the presence of such factors. A general
model of revenues for product i—with complementarities between factors—could be specified similarly to …
product demand function
REVi  PRICEi  Q(PRICEi ,QUALITYi , ADVERTISINGi ,TMi )
 PRICEi  (a0 i  PRICEia1 i  QUALITYi a2 i  ADVERTISINGia3 i  TMia4 i )
… where a1i, a2i, a2i, a3i, and a4i are elasticities of product i demand with respect to such factors (other factors
would perhaps be included depending on the product and firm). An econometric model of the theoretical
model, with first-order interaction terms capturing complementarities, could be specified similarly to …

 11  1   21   PRICEi  QUALi 
  
    PRICE   22   PRICEi  ADVi 
 12   i    xi 
 23   PRICEi  TMi   1    e
REVi   13   QUALi         
    QUALi  ADVi    
14   ADVi   24    k   zi  TMi 
     
    TM   25   QUALi  TMi 
 15   i      ADV  TM  other risk factor effects
 26   i i  and interactions
© 2011-2012 Equilibrio Capital | Brasil 9

10. Valuation services
Intangible asset valuation: Derivation of fair market value estimates
Using historical data on revenues and factors influencing revenues (as suggested above), the parameters of the
econometric model are estimated and tested—most often using least squares and least absolute deviation
methods—resulting in parameter estimates, 11 ,..., 26 , 1 ,..., k , representing the conditional mean effects of such
ˆ ˆ ˆ ˆ
factors on revenues. Then using econometric methods to estimate certainty-equivalent risk factor levels, and
differential calculus, allows estimation of certain-equivalent marginal effects of the trademark on revenues:
CFi ce (x ) REVi ce (x )
  15  23PRICEi*  25QUAL*  26 ADVi*   k zi*  ... .
ˆ ˆ ˆ ˆ ˆ
TMi TMi
i
Conditional on risk factor forecasts, fair market value of the trademark (or other intangible asset) follows in a
very direct way:
  CF1ce(x1 )  1  CF2ce(x2 )  2
 
 CFTce(xT )  T

FMV0 (TM; x )    Rf 1    R f 2  ...    R fT . 
 TM   TM   TM 
It can be seen that—unlike commonly used valuation methods which often rely on reasonable but unsupported
assumptions and professional judgment—using modern asset pricing theory and econometric analysis results in
clear, transparent valuations with supportable-and-supported assumptions, which is critical in transaction
advisory services, financial reporting, and auditing. 
© 2011-2012 Equilibrio Capital | Brasil 10

11. Valuation services
Intangible asset valuation: Auditors’ difficulty in obtaining valuation evidence
PCAOB Inspection Reports in the US clearly suggest that commonly used valuation methods—often relying on
reasonable but unsupported assumptions and professional judgment—cause auditors difficulty in obtaining
audit evidence on intangible asset valuation:
Audit firm Selected PCAOB Inspection Report Observations
Deloitte & Touche LLP ........................... Auditors failed to obtain adequate evidence on assumptions supporting valuation and
impairment tests of goodwill and long-lived asset (PCAOB Release No. 104-2011-290;
Issuers F, N, O, P, R).
Ernst & Young LLP .................................. Auditors failed to obtain adequate evidence supporting valuation of acquired assets
and liabilities, including evidence supporting significant valuation assumptions with
respect to intangible assets (PCAOB Release No. 104-2011-319; Issuer K).
PricewaterhouseCoopers LLP ................. Auditors failed to obtain adequate evidence supporting valuation of acquired assets
and liabilities for two business combinations, including evidence supporting significant
valuation assumptions with respect to intangible assets (PCAOB Release No. 104-
2011-289; Issuer D).
BDO USA LLP .......................................... Auditors failed to obtain adequate evidence on assumptions supporting valuation and
impairment tests of goodwill and long-lived assets (PCAOB Release No. 104-2012-071;
Issuers A and C). 
© 2011-2012 Equilibrio Capital | Brasil 11

12. Valuation services
Recent valuation services projects
Client description Project description
Subsidiary of major Asian central bank (Brazil) ............................ modeling and forecasting, economic feasibility analysis, and assistance
Financial
with Brazilian regulatory processes and bank licensing.
Pharmaceutical wholesaler-distributor (Brazil) ............................
Transaction advisory services with respect to equity pricing in M&A process, and
related due diligence services (R$ 120M).
Rare automobile exhibition company (Portugal) ...........................
Econometric analysis, demand estimation and revenue modeling, financial
modeling and forecasting, transaction advisory services with respect to pricing
of private equity issuance (€ 40M).
Generic pharmaceutical manufacturer (Brazil) ..............................
Econometric analysis, demand estimation and revenue modeling, financial
modeling and forecasting, transaction advisory services with respect to equity
pricing for potential M&A transaction (R$ 80M).
Surgical implant device R&D firm (US) .......................................... modeling and forecasting, intellectual property value estimation for
Financial
use in equity price negotiations with strategic investor (US$ 41M).
Industrial chemical process R&D firm (Canada) ............................ modeling and forecasting, intellectual property value estimation for
Financial
use in acquisition price allocation and equity price negotiations with strategic
investor (US$ 23M).
Construction technology R&D firm (US) ........................................ modeling and forecasting, intellectual property value estimation for
Financial
use in equity price negotiations with UK venture capital firm (US$ 26M).
E-commerce—professional services marketing (Brazil) .... Financial modeling and forecasting, intellectual property value estimation,
transaction advisory services with respect to private equity issue pricing and
capital structure (R$ 6M).
Marketing and communications firm (Brazil) ...............................
Econometric analysis, demand estimation and revenue modeling, financial
modeling and forecasting, transaction advisory services with respect to equity
pricing and compensation contract negotiation (R$ 5.5M).
© 2011-2012 Equilibrio Capital | Brasil 12

13. Valuation services
EquilÍbrio Capital | Brasil
Equilíbrio Capital provides valuation, due diligence, and research-based transaction advisory services:
© 2011-2012 Equilibrio Capital | Brasil 13

14. Valuation services
Valdir Jorge Mompean, MS, MBA
Executive Director
Mr. Mompean has over 25 years combined experience in auditing, management consulting, research, company organization
and restructuring, and merger and acquisitions transactions. In recent years he has provided management consulting, private
investment banking, and tax advisory services to many major Brazilian banks, multinational corporations, and to large and
middle-market Brazilian firms. His primary areas of expertise include:
:: advice on equity transaction pricing and negotiation assistance
:: development of structured finance solutions
:: identification and vetting of merger and acquisition targets and strategic partners
:: development of resource and capital acquisition strategies
:: organizational structuring and integrated multi-tax planning
:: analysis of new market opportunities and related industries
Such experience was obtained through the following engagements:
:: President – Mompean & Associados, Auditores Independentes, 2005 – present.
:: Director – Global Financial Services Industry Practice, Deloitte Touche Tohmatsu, 1999 – 2002.
:: Controller – International Settlements, Banco Itaú, 1992 – 1999.
:: Audit Senior – Deloitte Touche Tohmatsu, 1989 – 1992.
Mr. Mompean has held academic appointments at Instituto Presbiteriano Mackenzie, Fundação Escola do Comércio Álvares Penteado, and Centro
Universitário Fundação Santo André where he has taught courses in accounting, finance, business administration, controllership, foreign trade, and
economic engineering. Mr. Mompean holds a bachelors degree in Accounting from Faculdade de Ciências Econômicas e Administrativas de Santo
André (Sao Paulo), and MBA (Finance) from Instituto Brasileiro de Mercado de Capitais (IBMEC, now INSPER), and a M.S. in Accounting and Actuarial
Calculations from Pontificía Universidade Católica de São Paulo. 
© 2011-2012 Equilibrio Capital | Brasil 14

15. Valuation services
Nilson de Lima Barboza, MBA
Director – Capital Market Advisory Services
Mr. de Lima Barboza has over 20 years combined experience in auditing, management consulting, information
systems development, and risk management through numerous engagements with Brazilian banks and
insurance companies, and as director of internal auditing and risk management—and as financial expert of the
Audit Committee—of a major commercial bank in São Paulo, Brazil. His primary areas of expertise are in
capital market transaction advisory services including risk analysis, transaction negotiation, due diligence
investigations:
:: Audit Committee, Member and Financial Expert – Banco Daycoval S.A., 2009 – 2010.
:: Operational Risk Manager – Banco Daycoval S.A., 2007 – 2009.
:: Director – Global Financial Services Industry Practice – Deloitte Touche Tohmatsu, 1990 – 2007.
Auditing and consulting services director, which included management of Initial Public Offering
processes of two of the most prominent middle-market commercial banks in Brazil: Banco Pine
S.A. and Banco Daycoval S.A.
Mr. de Lima Barboza holds bachelor’s degree in Accounting Sciences from Universidade São Judas Tadeu (São Paulo), post-
graduate training in controllership from FECAP (São Paulo), an MBA (Finance) from Instituto Brasileiro de Mercado de Capitais
(IBMEC, now INSPER), and completed Syracuse University’s Business Extension Course in Syracuse, New York (US). 
© 2011-2012 Equilibrio Capital | Brasil 15

16. Valuation services
Malcolm McLelland, Ph.D.
Director – Research and Analytical Services
Dr. McLelland has over 25 years combined experience in consulting, research, accounting and auditing. His primary areas of
expertise are in econometric analysis, financial modeling, and valuation, which he has used in a wide variety of engagements
including those relating to:
:: estimation of market demand and competitor supply and cost functions
:: merger and acquisition analysis, structuring, and valuation
:: negotiating private debt and equity placements
:: capital planning, (re)structuring, and reorganization
His involvement in engagements relating directly to commercial banks and financial institutions include:
:: Commercial loan portfolio analyses with respect to middle-market commercial loan portfolio quality and
valuation in the Midwestern US and the metropolitan Indianapolis, Indiana (USA) area.
:: Bank acquisition investigations with respect to commercial loan portfolio quality and loss estimation in the
Indianapolis, Indiana region.
:: Independent arbiter appointed by the Federal Home Loan Bank (Indianapolis) with respect to disputed bank
examiner findings on commercial loan portfolio quality and loss estimation.
:: Development of integrated bank financial models for community banks in the metropolitan Indianapolis, Indiana
area used in strategic planning, asset-liability management policy, capital planning, and performance evaluation.
Dr. McLelland’s academic research primarily involves how commercial banks optimally use accounting discretion and the (dis)information content of
commercial bank financial statements, which has been published in Review of Accounting & Finance, Managerial Finance, and on the Social Science
Research Network. Dr. McLelland has held academic appointments at University of Illinois at Chicago, Purdue University, Indiana University, and
Steinbeis University | Stuttgart Institute of Management and Technology (Germany). He holds a B.S. in Business (Accounting) from Indiana University,
and a Ph.D. in Business Administration (Accounting and Econometrics) from Michigan State University. 
© 2011-2012 Equilibrio Capital | Brasil 16

17. Valuation services
José Ferreira da Silva
Affiliate expert — International and Domestic Taxation
Mr. Ferreira da Silva and Equilibrio Capital are affiliated through joint consulting engagements where
domestic Brazilian and international taxation expertise is required, particularly with respect to deferred
tax asset valuation and due diligence procedures with respect to tax matters.
Mr. Ferreira da Silva has been engaged as an international taxation consultant since 1985, including
many years of experience with Deloitte & Touche and Ernst & Young where he was responsible for
coordinating large portfolios of business clients, as well as for developing, managing, and training teams
of tax professionals. His specialties include tax consulting for corporate clients on matters relating to:
:: federal, state and municipal, local and international tax planning
:: company incorporation
:: corporate mergers-acquisitions-restructurings
:: due diligence with respect to tax matters
:: advising on the acquisition or sale of businesses
:: foreign investment in Brazil
Mr. Ferreira da Silva holds a degree in Accounting from Faculdades Oswaldo Cruz (São Paulo). 
© 2011-2012 Equilibrio Capital | Brasil 17

18. Valuation services
Andreas Hauskrecht, Ph.D.
Affiliate expert — Financial risk and macroeconomic risk management
Dr. Hauskrecht and Equilibrio Capital are affiliated through joint research and client advisory service projects primarily with
respect to Latin American financial institutions. He has extensive expertise in international economics, monetary economics, and
macroeconomics, as well as in central bank regulatory matters and financial institution risk evaluation and management. Dr.
Hauskrecht has been engaged as a global banking industry consultant and governmental economic advisor for over 20 years:
:: Adviser to the Prime Minister of Vietnam and its Politburo, 1991 – present.
:: Project Director, Supporting Vietnam in Reforming its Banking System, 1994 – present, project sponsored by
the German Ministry for Economic Cooperation (BMZ), executed by German Technical Cooperation (GTZ).
:: Program Director, Southeast Asia Central Bank Cooperation on behalf of GTZ.
:: Adviser to the National Bank of Moldova, June-July 1999, December 2000, project on behalf of BMZ, executed
by GTZ.
:: Adviser to the Central Bank of Laos, 1994, on behalf of the BMZ, executed by GTZ.
:: Adviser to the Central Bank of Bolivia, 1993, on behalf of German Foundation of International Cooperation.
Dr. Hauskrecht’s research on international financial institutions, monetary policy, and foreign exchange matters has been published widely and he
holds the following academic appointments: Clinical Associate Professor of Business Economics and Public Policy at the Kelley Graduate School of
Business, Indiana University, Bloomington, Indiana (USA); Adjunct Professor of Economics, National Economic University, Hanoi, Vietnam; and Visiting
Scholar, German Graduate School of Management and Law, Heilbronn, Germany. Dr. Hauskrecht holds masters degrees in political science and
economics, and a Ph.D. in economics, from Freie Universitaet Berlin. 
© 2011-2012 Equilibrio Capital | Brasil 18

19. Valuation services
Contact information
Valdir Jorge Mompean Nilson de Lima Barboza Malcolm McLelland
mompean@equilibriocapital.com lima.nb@equilibriocapital.com malcolm.mc@equilibriocapital.com
+55.11.8794.0550 (BR cell) +55.11.8181.2542 (BR cell) +55.11.8797.1064 (BR cell)
+01.312.506.8679 (US cell)
Equilíbrio Capital | Brasil Equilíbrio Capital | Brasil Equilíbrio Capital | Brasil
Rua da Consolação 222, Conj 607 Rua da Consolação 222, Conj 607 Rua da Consolação 222, Conj 607
Consolação – CEP 01302-000 Consolação – CEP 01302-000 Consolação – CEP 01302-000
São Paulo SP - Brasil São Paulo SP - Brasil São Paulo SP - Brasil
+55.11.3129.7423 +55.11.3129.7423 +55.11.3129.7423
© 2011-2012 Equilibrio Capital | Brasil 19