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because, historically,11 80 percent of those costs had been
reimbursed to CSB, usually within 2 years. He added as an asset
of CSB a discounted present value of these costs of $676,641. He
estimated that the June 30, 1988, value of CSB’s work in process
on contingent fee cases was $3,842,143.
Johnson also used the discounted discretionary cash-flow
(DDCF) method. He considered expenses (other than compensation)
incurred during the 5-year period before June 30, 1988, in
deciding how to reduce net fees. He estimated that base
compensation had historically been about 30 percent of CSB’s net
fees. He estimated the amount of discretionary cash available to
CSB over a 5-year period beginning in 1989, and he used as a
discount the rate of return on 30-year Treasury bonds. He
estimated the residual value by capitalizing the estimated 1993
cash-flow (which he assumed would continue in perpetuity) at 25
percent. He calculated that the present value was 15 percent to
estimate the value of CSB.
Generally, use of the DDCF method requires assumptions to be
made about future revenue, operating costs, and practice trends
to estimate the present value of future discretionary cash-flow
and the future value of the corporation. Johnson, however, used
actual CSB financial data for June 30, 1988, to December 31,
11 Johnson concluded by considering data for years through
1991 that CSB had been reimbursed 80 percent of client costs.
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