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Financing risks and the application of the Spencer market value concept


The seminal definition of market value, established in Spencer v The Commonwealth, has wide-ranging tax implications. However, the application of the Spencer market value concept in cases where new capital needs to be raised to finance long-term high-risk investments poses significant conceptual and practical challenges, which are directly linked to the significant presence of financing risks for this type of investments, particularly in times of heightened market uncertainty.

This article examines the conceptual and practical challenges and the correct conceptual framework, and concludes that the appropriate way to deal with these valuation challenges is two-fold.The first is to recognise that both a hypothetical buyer and a hypothetical seller are fully informed of the market friction and the resultant financing risk present in these cases. The second is to explicitly allow for economic dilution when assessing the market value of the subject asset.

Author profile

Dr Hung Chu
Hung is a Director of Lonergan Edwards & Associates Limited. Dr Hung Chu completed his master degree in Finance and Banking (with Merit among the top 2% of graduates) from the University of Sydney and his doctoral degree in Finance from the University of Technology, Sydney (graduated on Chancellor's List for Exceptional Scholarly Achievement in PhD research). He has 12 years of experience in the provision of valuation services and numerous technical papers published in academic and practitioners' journals. - Current at 01 June 2016
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