- 28 -
previous year. He then added depreciation and deducted
capital expenditures to reach a final "debt-free residual
cash flow" for each year.
Next, Mr. Conklin reduced "debt-free residual cash
flow" each year to present value, applying a discount
rate of 35 percent. Mr. Conklin chose this discount rate
after examining the risk inherent in SWI's financial
structure and the risk associated with SWI's general
business enterprise. According to Mr. Conklin, the
discount rate reflects the rate of return an investor
would require before devoting money to a particular
enterprise, considering its particular economic, market,
and industry risks. In this regard, Mr. Conklin examined
the capital structure of the computer retailing industry,
as well as the economic, market, and industry risk on the
valuation date. He believed that SWI presented a
particularly risky investment due to difficulties in
obtaining financing for expansion and a high degree of
risk in the computer and related markets. Additionally,
Mr. Conklin believed that "The [discount] rates for
venture capital funds averaged between 30 to 60 percent
or more due to the business risk associated with SWI's
position." He did not cite any authority for this
conclusion either in his expert report or in his
testimony at trial, nor did he state whether this rate of
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