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apply the midyear convention here because respondent offered no
evidence that WSA would pay its investors at the middle of the
year rather than at the end of the year.
D. Estimating the Discount and Capitalization Rates
Shriner used the income capitalization method and Spiro used
the discounted cashflow method to estimate the fair market value
of WSA stock. In the discounted cashflow method, a discount rate
is applied to a series of future cashflow periods (e.g., each
year in the future that the asset will produce a return on
investment) to estimate present value. In the income
capitalization method, the future cashflow of a single period
(e.g., the next year) is estimated. An estimated growth rate is
applied to project the cashflow for that single period into the
future. An estimated discount rate is applied to reduce the
projected future cashflows to present value. A capitalization
rate combines the estimated growth rate and the discount rate.
It is applied to the estimated future cashflow of the single
period. Neither party contends that the other’s method is
inappropriate here.
Both experts began their analyses by estimating a discount
rate to apply to WSA’s projected net cashflow using the “build-
up method”. They both used a rate of return on risk-free
investments (risk-free rate) of 6.86 percent, which was the 30-
year Treasury rate for August 1995.
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