-22-
Dividends paid can be more important than dividend-paying
capacity in appraising minority interests because a minority
shareholder cannot force the company to pay dividends even if it
has the capacity to do so. Pratt, Valuing a Business: The
Analysis and Appraisal of Closely Held Companies 227 (1996).
Respondent relies on Driver v. United States, 76-2 USTC par.
13,155, 38 AFTR 2d 76-6315 (W.D. Wis. 1976), for the proposition
that dividends are not a significant factor in valuing closely
held stock. In Driver, the decedent made gifts of a majority of
the stock in a closely held telephone company in Wisconsin. The
donee of the stock in Driver received a majority interest in and
control of the company; in contrast, the donees of Rock Hill
nonvoting stock had no right to participate in any decision
related to the company, and the donees of Home stock had about 1
percent of the voting stock. Thus, the donees here could not
force the companies to pay dividends or salaries.
3. Small Stock Premium
Hawkins included a small stock premium11 of 5.1 percent in
calculating the discount rate he used to capitalize Home and Rock
11 A small stock premium is an increase in the discount rate
used to capitalize the earnings of the stock of small companies
(smaller than S&P 500) on the theory that their average rates of
return are higher than those of large companies. See Pratt,
Valuing a Business: The Analysis and Appraisal of Closely Held
Companies 165 (1996).
Page: Previous 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 NextLast modified: May 25, 2011