- 14 - Respondent argues that applying a discount for Deft's potential environmental liabilities is improper because these liabilities have already been included in the unadjusted value calculation under the income method and the market method. We agree with respondent as to the market method but disagree as to the income method. Under the income method, HML discounted Deft's future cash flows to present value using a discount rate determined by the Capital Asset Pricing Model (CAPM). The discount rate represents the company's expected rate of return on equity. The CAPM uses several variables including a variable representing the company's volatility relative to market returns (Beta). Deft's Beta was determined based upon the Betas of eight similar paint and finishing companies. Respondent contends that these paint and finishing companies had Betas considerably higher than other companies’ because most paint and finishing companies have potential environmental liabilities that make the return on investment in these companies more volatile. Respondent argues that these Betas already include the potential environmental liabilities of these companies; therefore, it is improper to also consider these liabilities in determining the proper discount. We disagree with respondent. Respondent provided no evidence at trial that the Betas of the eight comparable paint companies were higher than normal due to potential environmental liabilities faced by these companies.Page: Previous 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 Next
Last modified: May 25, 2011