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petitioners' value during the years in issue. Petitioners' other
experts used Poppei's values and conclusions to evaluate
petitioners' financial condition, including capitalization.
Poppei testified that LII's financial performance was better than
WMI's and BFI's. However, her peer group financial performance
charts show that WMI and BFI performed better financially than
petitioners did. These charts are corroborated by petitioners'
credit analyst, Carol Verschell, who said in her expert report
that the debt to equity ratios for BFI and WMI were superior to
petitioners'.
b. Use of Fair Market Values To Compute Debt to
Equity Ratios
Petitioners contend that we should use fair market values
and not book values to compute debt to equity ratios.
Petitioners point out that Jacobs testified that there is an
"increasing focus on market value of equity versus book equity in
analyzing capital structure" especially in the leveraged buyout
market, and that he concluded that petitioners were adequately
capitalized. Jacobs also testified that investment bankers
provided funds for highly-leveraged transactions based on cash-
flow.
We disagree. As discussed at pars. I-H-2 and II-D-3, above,
petitioners' cash-flow was poor. The leverage ratios and
coverage ratios in petitioners' loan agreements were based on
book values. None of the loan documents stated that the leverage
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