- 31 -
fluctuated between 1.7 percent and 7.58 percent during
the 4-year period from 1986 to 1989. Our computation of
those percentages is as follows:
In Thousands 1985 1986 1987 1988 1989
Total sales $3,000 $11,739 $32,124$66,566 $137,458
Change from previous year-- 8,739 20,385 34,442 70,892
Working capital -- 211 347 1,777 5,376
Incremental working capital --2.41% 1.70% 5.16% 7.58%
The discount rate employed in Mr. Conklin's valua-
tion model is also bothersome. Mr. Conklin testified that
he chose a discount rate of 35 percent to reflect the rate
of return required by venture capitalists before devoting
money to a particular enterprise. Mr. Conklin testified
that venture capitalists generally require between 30- and
60-percent return, and that his 35-percent discount rate
was "conservative". However, Mr. Conklin did not provide
any objective support, either at trial or in his expert
report, for selecting a discount rate in this range.
Moreover, the discount rate is another extremely
problematic variable in Mr. Conklin's model. Changing the
discount rate just 2 percentage points, from 35 to 33
percent, leaving all other variables the same and applying
a 7-percent growth rate, causes an increase in the overall
valuation from, by our calculation, $47.33 per share to
$1,161 per share. A discount rate of 30 percent produces
a final value of $3,551 per share. Once again, the
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