- 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 NextLast modified: May 25, 2011