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to compute the August 1981 fair market value of the stock.
IPC applied CAPM principles to determine the rate of return
an investor would expect in February 1980 and August 1981. IPC
used market data from Ibbotson Associates13 and determined that
the expected rate of return an investor in FIC stock would demand
would be equal to the sum of the applicable risk-free rate, risk
premium, and small-stock premium, as well as an additional
premium to account for the risk specific to FIC. To reflect the
effect of nominal long-term earnings growth, IPC subtracted a
growth factor14 from the expected rate of return and determined a
capitalization rate of 21.38 percent for valuing the 1980 Gifts
and a 25.50 percent capitalization rate for valuing the stock
transferred in the Recapitalization.
After capitalizing normalized earnings to determine
enterprise value from operations, IPC added the market value of
FIC's nonoperating assets to determine total equity value. IPC
computed a per-share equity value of $11,366 for the 1980 Gifts
13 The parties stipulated that the Ibbotson Associates
figures used by IPC were correct for the dates in question. They
have not stipulated: (1) The proper capitalization rate; (2) the
correctness of any FIC specific risk premium; or (3) the
correctness of any particular method of computing a
capitalization rate.
14 IPC determined growth factors of 8 percent for the 1980
Gifts and 7 percent for the Recapitalization, on the basis of the
long-term inflation outlook of the Value Line Investment Survey
on Feb. 1, 1980, and Aug. 21, 1981. Apparently, IPC did not take
into account the likelihood of real earnings growth attributable
to FIC's ability to open more restaurants in its expanding
market, as well as the likelihood of increasing sales in the
existing restaurants.
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