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Klemm determined the value of the shares based on (1) a
capitalization of the corporation’s 1989 earnings, (2) a
capitalization of the corporation’s 1989 revenues, and (3) a
return-on-equity analysis using the book value per share as of
the end of 1989.
To capitalize the corporation’s 1989 earnings Klemm utilized
a capitalization rate that, in his report, he did not relate to
any specific publicly traded companies but merely stated was
“appropriate” after discussing the “price/earnings ratio of the
Dow Jones Industrial Average” at October 20, 1989, and the range
of that average for 5 years. In his report, Klemm did not
explain the capitalization rate that he used to capitalize the
corporation’s revenues. To perform his return-to-equity
analysis, Klemm again referred to Dow Jones Industrial Averages
but failed to specify any companies comparable to the
corporation. Klemm had prepared an earlier report valuing the
shares, which was appended to the estate tax return filed by
petitioner. In that earlier report, Klemm listed eight publicly
traded companies that he considered comparable to the
corporation. Seven of those eight companies were omitted from
the report received as Klemm’s testimony. One company (Altera
Corp.) is mentioned, but no analysis of that company to support
Klemm’s valuation methods is provided.
Using his three approaches, Klemm arrived at the following
three indications of value for each of the shares:
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