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3. Lack of Marketability Discount
Mr. McCoy examined several studies that considered the lack
of marketability of closely held and restricted securities.
Mr. McCoy testified that, based on his examination, an average
lack of marketability discount for shares that would eventually
become freely tradable was "30%+". Mr. McCoy then concluded that
a greater discount was required for the G&J shares because they
were illiquid and not marketable.3 Mr. McCoy testified that a
discount rate of at least 35 percent was required to compensate
an owner for the lack of marketability of those shares.
4. Cost of Capital
Mr. McCoy testified that G&J's cost of equity capital was
19 percent.4 He explained that G&J compared in size to very
2(...continued)
generally is not subject to the sec. 11 tax. See sec. 1363(a).
Instead, the items of income, loss, deduction, or credit, of the
S corporation are passed through to the shareholders of the S
corporation and are taken into account directly in computing
their tax liabilities. See sec. 1366(a). Additionally, in Ohio,
S corporations (such as G&J) are not subject to State income tax.
See Ohio Rev. Code Ann. sec. 5733.09(B) (Banks-Baldwin 1995).
3 Specifically, Mr. McCoy noted that, in addition to being
closely held, the G&J shares were restricted as to
transferability and were subject to a right of first refusal.
4 In his oral testimony, Mr. McCoy distinguished between
“nominal” and “real” numbers. Mr. McCoy testified that the
difference was that the effects of inflation, which he opined to
be 4 percent, were eliminated from “nominal” numbers to produce
“real” numbers. Mr. McCoy explained that we must add his opined
4-percent inflation rate to his reported cost of equity
(continued...)
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