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one category; (3) size of the company; (4) lack of professional
management; and (5) C corporation status. A 10-percent discount
for lack of marketability to reflect these factors was apparently
incorporated by Mr. Lax into his final determination of fair
market value.
Mr. Lax determined that Johnco was a "negative cash flow
producing C corporation holding company" whose assets could not
support a $7 million purchase price. He concluded that it was
obvious that a willing buyer would buy decedent's Johnco stock
only if Johnco's assets could quickly be sold for a fair return.
After analyzing publicly traded timber companies, Mr. Lax
determined that those companies realized a return on equity (ROE)
between 9 percent and 12 percent. But unlike Johnco, Mr. Lax
observed, those companies had professional management,
geographically diverse assets, and the ability to borrow to cover
short-term downturns. By comparison, Johnco, Mr. Lax concluded,
was "on the small end of being a viable timber company" and had
very limited professional management and no geographical
diversity.
Using the Capital Asset Pricing Model (CAPM) and the
Arbitrage Pricing Theory (APT), Mr. Lax determined a cost of
equity (COE) for the large publicly traded timber companies of
12.67 percent. Due to the limiting characteristics of Johnco,
Mr. Lax concluded that a buyer of decedent's Johnco stock would
demand a premium of a 5-percent to 10-percent greater return, so
that an annual pretax ROE of 17 percent to 22 percent would be
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