- 15 -
the observed discounts6 could be attributed to a lack of
marketability. With regard to the second category, Dr. Bajaj
concluded that the published results were not useful in
evaluating discount levels for two reasons. First, Dr. Bajaj
testified that many of the pre-IPO private market transactions
probably did not occur at fair market value. Second, Dr. Bajaj
testified that examining only a selection of firms that carried
out successful IPOs was a biased statistical sample, and that
such bias would tend to increase the apparent "discount".
Relying more on his own empirical analysis of lack of
marketability discounts, and considering such factors as G&J's
generous dividend policy and its greater marketability
restrictions (i.e., the restrictive transfer agreements),
Dr. Bajaj concluded that a conservative estimate of the lack of
marketability discount for G&J's shares on the valuation date was
25 percent.
4. Cost of Capital
Dr. Bajaj used a 15.5-percent cost of equity and a
8.25-percent cost of debt to derive a 14.4-percent weighted cost
of capital for G&J. He used the capital asset pricing model to
derive his opined cost of equity. Dr. Bajaj used 7.46 percent as
6 According to Dr. Bajaj, the studies that analyzed sales of
restricted stock by firms that also had publicly traded shares
demonstrated that the median discounts ranged from 10 to 40
percent.
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