- 30 -
companies for this purpose. Finally, we reject Mr. Shelton's
methodology for estimating FIC's beta, since it was based on
BKC's industry standing and not on references to the volatility
of stock in FIC in comparison to the market as a whole.11 See
Brealey & Myers, supra at G2 (defining beta as a "measure of
market risk").
Mr. Shelton's use and application of the WACC fares no
better under our scrutiny. WACC is generally used to calculate a
discount rate that reflects the weighted average cost of each of
the components of a firm's capital structure. To compute WACC,
it is necessary to know the market value of the firm's debt and
equity, which if known, would go far toward negating the need to
perform a valuation. In computing WACC, Mr. Shelton used FIC's
book value weighting of debt and equity, rather than market
value, without justifying his departure.
We also find fault with Mr. Shelton's computation of EBIDT
and the manner in which he arrives at an enterprise value as of
August 24, 1981. Since the parties have stipulated the proper
EBIDTA amounts for the periods in question, we abstain from
further comment on Mr. Shelton's computation of EBIDT. We do,
11 Mr. Shelton's conception of beta as a measure of the
relative volatility of a specific security in comparison to an
industry should not be confused with industry beta, which is
often used to calculate discount or capitalization rates.
Industry beta is calculated from the individual betas of a
portfolio of securities within the same industry and reflects the
market risk of that industry portfolio. See Brealey & Myers,
supra at 189. Unlike Mr. Shelton's method, industry beta focuses
on market risk.
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