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1992. For 1993, Johnson used the average of CSB’s data for 1991
and 1992. Using the DDCF method, he valued CSB at $5,209,000 as
of June 30, 1988.
Johnson also analyzed CSB’s excess earnings. Johnson
admitted that this method is less reliable than the DDCF method.
He adjusted CSB’s net income for 1987 and 1988 to normalize the
compensation paid to its attorneys to that paid by comparable law
practices, assumed CSB had a 12-percent return on equity, and
capitalized the result at 25 percent for goodwill value. He then
added goodwill to the 1987 and 1988 book (net equity) values.
Using this method, he concluded that CSB was worth $4,525,009 in
1987 and $4,520,143 in 1988.
Johnson applied two versions of a "rule of thumb" for
valuing CSB stock. He applied a rule of thumb which assumes that
a firm is worth what it owns plus what it earns. Pratt, Valuing
Small Businesses and Professional Practices 188-189 (1986).
Johnson admitted that this method is less reliable than the DDCF
method. He started with book value as of June 30, 1988. He
added a goodwill element of 55 percent of CSB’s average fees for
the 2 years before 1988 and estimated that the value of CSB was
$4,788,624. For comparison, he also added a goodwill element of
60 percent of CSB’s average fees for the 2 years before 1988 and
estimated that CSB was worth $5,125,062.
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