Walter L. Gross, Jr., and Barbara H. Gross - Page 28




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               Although perhaps less likely, Mr. Wilhoite may believe that,            
          as a matter of proper application of a present value analysis,               
          Dr. Bajaj was required to tax affect G&J’s expected distributions            
          on account of the expected tax burden to be borne by its                     
          shareholders.  Dr. Bajaj assumed that G&J would continue to                  
          distribute all of its earnings annually.  He made no explicit                
          adjustment for any shareholder level taxes, although,                        
          undoubtedly, he knew such taxes would be due.  Dr. Bajaj did not,            
          however, ignore shareholder level taxes.  He simply disregarded              
          them both in projecting G&J’s available cash and in determining              
          the appropriate discount rate.  The present value of any future              
          (deferred) cash-flow is a function of three variables:  (1) the              
          amount of the cash-flow, (2) the discount rate, and (3) the                  
          period of deferral.11  The discount rate reflects the return,                
          over time, to the investor on the amount invested (commonly                  
          expressed as a rate of interest).  If, in determining the present            
          value of any future payment, the discount rate is assumed to be              
          an after-shareholder-tax rate of return, then the cash-flow                  
          should be reduced (“tax affected”) to an after-shareholder-tax               
          amount.  If, on the other hand, a preshareholder-tax discount                
          rate is applied, no adjustment for taxes should be made to the               


          11   PV = C/(1+r)n, where PV equals the present value, r equals              
          the discount rate, C equals the cash-flow, and n equals the                  
          number of periods of deferral.                                               




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