BTR Dunlop Holdings, Inc. - Page 18




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          value using the discount rate.  Under the DCF method, the present           
          value of the cash-flow projections and the terminal value are               
          ascertained using the appropriate discount rate, and the sum of             
          those amounts is the fair market value of the company.                      
               The discount rate is calculated using the weighted average             
          cost of capital (WACC) formula, which combines the after-tax                
          costs of debt and equity into a weighted average overall cost of            
          capital.  The cost-of-equity capital is equivalent to the long-             
          term expected annual rate of return an investor seeks on an                 
          investment in stock.  It is calculated using the capital asset              
          pricing model (CAPM).                                                       
               One of the variables in the CAPM formula is beta, which                
          measures the volatility in financial returns of a target firm.              
          Beta is calculated by comparing the movement in the returns of a            
          stock against the movement in the returns of the stock market as            
          a whole, which has a beta of 1.  For example, if a stock                    
          generally increases 2 percent in price when the market increases            
          by 1 percent, the stock would have a beta of 2 (2 divided by 1).            
               Shapiro calculated beta for Schlegel UK using the average              
          beta from nine companies that he determined to be in a similar              
          business as Schlegel UK.  The average beta for the nine companies           
          was .87 with a range from .56 to 1.11.  Because Schlegel UK                 
          maintains relatively little debt in its capital structure,                  
          Shapiro then adjusted for the different degrees of debt leverage            





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Last modified: May 25, 2011