Nathan P. and Geraldine V. Morton - Page 26

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             of an expert's testimony and reject others.  Helvering v.                
             National Grocery Co., 304 U.S. 282 (1938).                               
                  Petitioners' expert, Mr. Robert Conklin of Ernst &                  
             Young, relied solely on the income approach in valuing                   
             the SWI stock.  Mr. Conklin did not use the market                       
             comparison approach because he believed that there were                  
             no sufficiently comparable companies in existence as of                  
             the valuation date.  He did not use the cost approach                    
             because he felt it "tends to minimize the value of assets                
             and fails to consider intangibles such as goodwill."                     
                  Mr. Conklin utilized a "discounted cash flow                        
             analysis" to calculate the fair market value of SWI                      
             stock.  Under this analysis, the value of stock is equal                 
             to the present value of the cash flow the company is                     
             expected to generate in the future.  Mr. Conklin began                   
             his analysis by estimating SWI's net income for the 10-                  
             year period from 1990 to 1999, and what he described as a                
             "terminal year".  He calculated this net income figure by                
             estimating the total sales SWI could expect to generate                  
             from each store and multiplying by the number of stores                  
             SWI could be expected to operate each year.  Mr. Conklin                 
             assumed that SWI would expand its operations rapidly from                
             1989 to 1994, and that it would open a constant number of                
             new stores each year thereafter until 1999, reaching a                   
             total of 271 stores in that year.  He also assumed that                  




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