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

Graves Frank C., Zhou Bin, Brosterman Melvin and Murphy Quinlan
Additional contact information
Graves Frank C.: The Brattle Group
Zhou Bin: The Brattle Group
Brosterman Melvin: Stroock & Stroock & Lavan LLP
Murphy Quinlan: Stroock & Stroock & Lavan LLP

Journal of Business Valuation and Economic Loss Analysis, 2010, vol. 5, issue 1, 22

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.

Keywords: valuation; risk; cost of capital (search for similar items in EconPapers)
Date: 2010
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DOI: 10.2202/1932-9156.1092

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