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basis,17 determining their present values to be as follows
(millions):
Discount Rate 20% 25% 30%
Case A $3.9 $3.8 $3.6
Case B 4.6 4.6 4.6
Case C 0.9 0.7 0.6
Like Mr. Lax, Mr. Buck determined that the highest present
value would be realized through a liquidation, insofar as the
prospective buyer would receive a large cash inflow within a
relatively short time. Although a quick sale of the Timber
Property might result in a lower sale price, Mr. Buck concluded
that because of the high discount rates that would be demanded by
an investor, the present value of that strategy would be the
highest. Mr. Buck dismissed the option of operating Johnco as a
going concern, because "the economic benefits are not worth the
delay in getting cash".
Mr. Buck testified that a hypothetical willing purchaser of
a controlling interest in a small company like Johnco would
expect a return on investment of at least 20 to 25 percent, and
perhaps as much as 30 to 35 percent. According to Mr. Buck, an
investor in a private company expects a higher rate of return
than an investor in a public company18 because of a lack of
investment liquidity, the uncertainty of the underlying asset
17 Mr. Buck's approach incorporated the effect of built-in
capital gains into the determination of fair market value by
calculating present value on an after-tax basis.
18 Mr. Buck assumed that historical returns of publicly
traded securities were in the range of 10 to 15 percent.
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