- 36 -
value for August 1981. While it is odd that the use of an
accepted method like this one would produce a value lower than
book value, this oddity is explained by IPC's incorrect
computation of book value for August 1981,15 and, we suspect, an
overstated capitalization rate.
Our major criticism of IPC's application of the income
method was their construction of the capitalization rate. In
deducting a long-term growth factor from the expected rate of
return, IPC deducted 8 percent for the 1980 capitalization rate
and 7 percent for the 1981 rate. Since these figures are
identical to the inflation estimates of the Value Line Investment
Survey that were cited by IPC in its report, the growth factors
used represented only the expectation of nominal earnings growth:
the growth in earnings caused by price inflation. FIC was a
growing business; real sales and earnings growth could be
expected, both from increased volume at existing restaurants and
from the construction of new stores in the Exclusive Territory,
15 IPC calculated discounted book value for August 1981
using the FY 1981 balance sheet. Discounted book value of the
common stock was calculated as total stockholders' equity, less
$600,000 to reflect the preferred stock issued in the
Recapitalization, and then minority and marketability discounts
were applied. Because the relevant valuation period is
immediately before the Recapitalization, at which time only one
class of stock existed, it was improper to use the unadjusted FY
1981 balance sheet figures reflecting the capital structure of
FIC after it had been recapitalized. Discounted book value
should have been computed as total stockholder's equity, subject
to the minority and marketability discounts, which would have
produced a discounted book value per share of $7,778 per share,
rather than the $5,048 per share determined by IPC.
Page: Previous 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 NextLast modified: May 25, 2011