- 31 -
however, question Mr. Shelton's failure to incorporate the
reported FY 1981 earnings of FIC into his August 24, 1981,
valuation; his estimate of 5-percent growth could hardly be
viewed as reasonable where actual EBIDTA growth for FY 1981 was
61 percent.12 We also fault Mr. Shelton's failure to deduct the
outstanding debt of FIC from his capitalization of EBIDT in
determining FIC's enterprise value.
Mr. Shelton's report also contains detailed calculations
from which he attempts to determine the replacement cost of
building 10 Burger King restaurants. We are unsure what
relevance such a calculation has to the valuation of a business
where value is determined by the prospect of future earnings
rather than net asset value. Moreover, Mr. Shelton's use of 1992
data in computing replacement cost is of no relevance to the
valuation of stock in 1980 and 1981.
Our final criticism of Mr. Shelton's report has little if
any bearing on his valuation conclusion but has again caused us
to doubt his expertise. In his report, Mr. Shelton attempted to
analyze the FY 1979 and FY 1980 balance sheets of FIC. Using the
FY 1979 balance sheet data of FIC, Mr. Shelton "projected" a 12-
month balance sheet for 1979 by substantially increasing the
amounts of some of the balance sheet items, without indicating
what items on the income statement would lead to such growth in
the amounts reported on the projected balance sheet.
12 Employing a larger growth factor would have led to a
higher valuation.
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