BTR Dunlop Holdings, Inc. - Page 19




                                       - 19 -                                         

          associated with the guideline companies and Schlegel UK.  This              
          process, referred to as unlevering, separates out the effects of            
          debt financing and is necessary because higher debt levels                  
          generally lead to higher betas.  Accordingly, beta is unlevered             
          to approximate the beta of a company that has no debt.  Shapiro             
          then relevered the beta to take into consideration a 35-percent             
          debt level based on VRC estimates of the Schlegel UK debt level             
          in Rachwal’s report.  Shapiro concluded that .84 was an                     
          appropriate beta for the CAPM calculation.                                  
               He also estimated the risk-free rate and the market risk               
          premium using U.S. data, because he was of the opinion that a               
          U.S. buyer would purchase Schlegel UK.  Based on these estimates,           
          Shapiro concluded that a 13.8-percent WACC was an appropriate               
          discount rate.  In his rebuttal report, Shapiro adjusted his beta           
          to .5 based on calculations he made with petitioner’s beta                  
          guideline companies.  He used that beta, the same risk-free rate,           
          and the U.K. market risk premium, concluding that the adjusted              
          WACC discount was 14.57 percent.                                            
               Shapiro used VRC sales forecasts as reproduced in the                  
          Internal Revenue Service (IRS) engineer’s report to calculate               
          free cash-flows and the appropriate terminal value of Schlegel              
          UK.  For cash-flows, Shapiro calculated earnings before                     
          depreciation, interest, and taxes (EBDIT), using the historic               
          rate of EBDIT from 1987 through June 30, 1989, and applied it to            





Page:  Previous  9  10  11  12  13  14  15  16  17  18  19  20  21  22  23  24  25  26  27  28  Next

Last modified: May 25, 2011