Louise B. Barnes, Donor, et al. - Page 20

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               2.   Importance of Dividend Yield                                      
               Respondent contends that Hawkins gave too much weight to the           
          capitalization of dividends and the capitalization of 3-year                
          average dividends multiples.  Respondent points out that section            
          25.2512-2(f)(2), Gift Tax Regs., and Rev. Rul. 59-60, 1959-1 C.B.           
          237, state that dividend-paying capacity should be considered in            
          estimating the value of closely held stock, and that the                    
          regulation does not say to consider actual dividends.  Respondent           
          contends that the capitalization of dividends method is                     
          unreliable and rarely used because the payment of dividends                 
          allegedly has little effect on the price of stock.  We disagree.            
               Hawkins gave more weight to actual dividends than to price             
          to earnings and price to gross cash-flow ratios because Home and            
          Rock Hill have significantly lower dividend payout ratios than              
          the guideline companies.  The dividend payout rates10 of Rock               
          Hill (12.62 percent) and Home (25.03 percent) were considerably             
          less than that of other guideline companies, whose dividend                 
          payout rates ranged from 27.78 percent to 85.31 percent.  Six of            
          10 guideline companies paid dividends totaling more than 50                 
          percent of their net income.  Hawkins testified that a public               


               10 Dividend payout equals dividends (excluding special                 
          dividends) per share divided by the net income available per                
          share.  It measures the extent to which the company pays its                
          earnings to shareholders.                                                   







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