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small capitalization public companies, which necessitated such a
required rate of return. In addition to his market-derived
required rate of return, Mr. McCoy further buttressed his opinion
by summing the following component risk factors of G&J's cost of
equity capital: (1) 2.1 percent as the risk-free rate of return,
(2) 7 percent as an equity risk premium, (3) 1 percent as an
adjustment for company specific risk, and finally (4) 4.8 percent
as a small capitalization risk premium.5
C. Dr. Bajaj’s Testimony
1. Introduction
Dr. Bajaj also stated that his assignment was to determine
the fair market value of certain minority blocks of stock in G&J.
Dr. Bajaj relied principally on a discounted cash-flow approach
to determine that value. To test the validity of his
conclusions, he considered the values of companies he thought
comparable to G&J. He also applied a discount for lack of
marketability, and he arrived at the aforementioned value for a
G&J share of $10,910.
4(...continued)
(15 percent) in order to convert it back to a nominal number for
comparative purposes. He, therefore, agreed that using “nominal”
numbers, his calculated cost of equity was 19 percent compared to
Dr. Bajaj's calculation of 15.5 percent.
5 Although the sum of Mr. McCoy's risk factors is 15 percent,
Mr. McCoy added 4 percent to his result in order to convert it
to a nominal rate of return for comparison purposes. See supra
note 4.
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